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In top gear! - Views on News from Equitymaster
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  • Apr 8, 2006

    In top gear!

    The bulls continued to charge ahead in top gear this week as well, with the BSE-Sensex and the NSE-Nifty gaining 2.7% and 1.5% respectively. The Sensex has thus gained 15% in seven consecutive weeks, making new lifetime highs along the way. However, while it was largely a smooth ride for investors during the first half of the holiday-shortened week, notwithstanding the minor profit-booking bouts at higher levels, the final trading day would have definitely given jitters to a big chunk of the investor community.

    Investors couldn't have asked for a stronger start than what was witnessed on the first trading day of the week. Riding strong on the back of the rally witnessed over the last 6 weeks, the bulls controlled the market proceedings right from the first trade on Monday. The Sensex went on to create history on this day (for 2006), as intense buying activity across-the-board (the advance-decline ratio was 9:1) helped it rally by as many as 284 points, the biggest gain since February 6, 2006 (238 points). The Sensex was, by now, well above the 11,550-mark. Tuesday's early trades were not much different from those of the previous day, as the Sensex had now breached the 11,700-level. While bears did make their presence felt by taking some profits off the table at higher levels, leading to a 140-point intra-day fall for the Sensex, the bulls stayed put, as their slow and steady buying helped the markets to end the day with respectable gains. The buying continued into Wednesday's trading session as well, with the Sensex gaining a further 100 points.

    Thursday was a holiday on account of a Hindu festival. However, it was on this day that Indian software major, Infosys, announced that it is considering a bonus issue. It must be noted that Infosys is due to announce its 4QFY06 results on April 14, 2006 (Friday), which again is a holiday. With this positive news having been announced, there was a scramble witnessed for the Infosys stock when the markets opened on Friday, with Infosys touching its lifetime high of Rs 3,400 (up by as much as 9% over its previous close), as investors lapped up the stock. Considering that Infosys has significant weightage (10%) on the Sensex, it witnessed a strong opening and beached the 11,900-mark in opening trades. However, as the Infosys stock cooled off, the markets too gave back some of their gains. This was all in the first half-an-hour of the trading session. With the euphoria now having settled down with respect to Infosys, the markets resumed their slow and steady upward move, back within striking distance of the 11,900-mark by noon. However, it is here that things took an ugly turn.

    A strong wave of panic selling gripped the markets on the back of rumours that the stock market regulator, Securities and Exchange Board of India (SEBI), had suspended 11 FIIs from the market. The reaction by market participants at this juncture must be viewed in the backdrop that FIIs have been the key 'pump-primers' of the stockmarket rally being witnessed in India. The Sensex lost 366 points in a matter of a few minutes. However, despite this news having been denied by SEBI (apparently late during market hours), the sentiments failed to recover and the markets closed with substantial losses. Nonetheless, at the end of it all, the Sensex ended the week with nearly 3% gains. Since the buying was broad-based this week, the BSE Mid Cap and the BSE Small Cap indices also gained 3.5% and 4.3% respectively.

    Foreign Institutional Investors (FIIs) and domestic mutual funds (MFs) continued their buying spree on the bourses, with the former investing Rs 9 bn in the first three trading sessions of the week, while the latter chipped in with Rs 3 bn. However, it would be interesting to note what the institutions did in the markets on Friday (date to be released on Monday evening), a day when the Sensex collapsed 366 points in intra-day trades.

    Top gainers over the week (NSE-50)
    Company Price on
    Mar 31 (Rs)
    Price on
    Apr 7 (Rs)
    H/L (Rs)
    BSE-SENSEX 11,280 11,589 2.7% 11,931 / 6,118
    S&P CNX NIFTY 3,403 3,455 1.5% 3,556 / 1,896
    ACC 782 887 13.4% 919 / 351
    CIPLA 662 725 9.5% 760 / 212
    L&T 2,433 2,640 8.5% 2,745 / 920
    BPCL 425 456 7.1% 474 / 339
    GRASIM 2,062 2,198 6.6% 2,275 / 1,010

    Now let us consider some sector/stock specific developments this week:

    • Engineering major, BHEL, announced its provisional results for FY06 this week. While the topline clocked an impressive 39% YoY growth, the bottomline grew by 70% YoY. The increase in revenues and profitability was attributed to a strong order book position. The outstanding order book for the year stood at Rs 375 bn, up 17% YoY. The company has also outlined plans to invest Rs 10 bn to increase its capacity to 11,000 MW per year over the next three years. The stock was up 6% this week. Other engineering stocks

    • Larsen & Toubro Ltd (L&T) was another big winner amongst the engineering stocks this week on the bourses. The company has bagged its first annuity-based road project valued at Rs 5.5 bn from the National Highways Authority of India (NHAI). The company's Engineering, Construction & Contracts (ECC) Division will execute the order in 30 months. NHAI is scheduled to pay the annuity as equated half-yearly installments, for a period of 15 years. The company will design, engineer, finance and maintain the road stretches for a period of 17 years and 6 months through a Special Purpose Company, L&T Interstate Road Corridor Ltd. This is the tenth BOT project secured by L&T, of which five are located on the Golden Quadrilateral, three on the North-South Corridor, one on the East-West Corridor and one on the state highways. The cumulative value of these projects exceeds Rs 37 bn. The stock was up 9% this week. Other engineering stocks

    • Global IT major, Electronic Data Systems (EDS), has made an open offer for US$ 380 m to acquire a 52% stake in the mid-sized IT and BPO company, MphasiS BFL. The purpose for this bid is to enable EDS to expand its offshore presence in India. EDS plans to acquire 83 m shares at Rs 204.5 per share. The offer is contingent upon EDS acquiring 83 m shares. If EDS does manage to acquire MphasiS BFL, it will be a positive for the company (MphasiS), since it will give the company access to a global network of over 50 countries, apart from a strong list of customers who could offshore more work to the company, going forward. The stock was up 2% for the week, taking the total gains to 16% in the last one month. Other software stocks

      Top losers over the week (NSE-50)
      Company Price on
      Mar 31 (Rs)
      Price on
      Apr 7 (Rs)
      H/L (Rs)
      HCL TECH 654 617 -5.7% 708 / 331
      SATYAM 849 816 -3.8% 918 / 364
      GAIL 319 307 -3.8% 326 / 199
      SAIL 83 80 -3.5% 90 / 47
      WIPRO 560 541 -3.4% 586 / 272

    • Broadcasting major, Zee Telefilms (Zee), has acquired from BCCI the global media rights for all cricket matches that India will play on neutral international venues for Rs 9.9 bn (US$ 219 m). As per the deal, Zee will have media rights (television, radio and Internet) for 25 matches to be played over a period of five years, starting from April 1, 2006. The average per match that Zee would pay to BCCI works out to Rs 396 m per match every year. In related sector development, the government has ordered for a complete rollout of CAS (conditional access system) in the four major metros in the next 280 days. Both these developments are envisaged to be revenue-accretive to Zee, which is in the process of restructuring its businesses. The stock was up 5% this week. Other media stocks

    To conclude, while the markets have continued to defy all laws of logic and gravity and continue to move northwards, proving everyone wrong (we are sure even most of the optimists would have not dreamt of such a rally), we continue to remain cautious. This is considering the facts that global interest rates (particularly in the US) have been on the rise, making investments in low-risk US treasuries and bonds attractive, higher domestic interest rates have been putting pressure on corporate profitability, valuations of Indian stocks being no longer attractive from a near-term perspective, with FY07 estimates (and in some cases even beyond) already factored into stock prices, and the Indian stockmarkets being relatively richly valued vis--vis most developing and many developed markets.

    The huge bouts of volatility must have given the chills to many short-term investors, though long-term investors need not worry about this. We continue to remain positive on the India story over the next 3 to 5 years and investors with only such kind of investment horizon should ideally (if they intend to) enter the markets at the current levels. While we do not deny the fact that there are still potential winners available at fair values in the large-cap as well as the mid-cap spaces, though these are increasingly getting difficult to find, investors need to be very careful about the plethora of news that floats in the market and we would strictly advise them to give it a deaf ear. Happy and safe investing!



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    Aug 17, 2017 12:00 PM