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Pre-earnings jitters...

Apr 9, 2005

At least that's what it seemed on the bourses this week, as the indices lost about 2% with most of the losses coming in the final two trading sessions of the week. While global crude oil prices continued to make headlines this week also, it has seemingly made investors all the more nervous about the sustainability of the growth currently being witnessed by India Inc. On the back of the strong gains witnessed in the second half of last week, the indices commenced trading on a rather cautious note. With the Sensex now well past the 6,600 levels again, investors preferred a wait-and-watch policy before making any serious commitments. For the entire trading session on Monday, the indices remained in a narrow range, without indicating any decisive trend on either side. The story was not much different on Tuesday. However, the volatility was a tad higher than the previous day with every effort by the bulls to gain some ground was being countered by selling pressure at higher levels. Further, while Wednesday was again the same for most part of the day, emergence of strong buying in the final hour of trade pushed the indices back over the 6,600 levels.

Key gainers over the week (NSE-50)
Company Price on
Apr 1 (Rs)
Price on
Apr 8 (Rs)
%
Change
52-Week
H/L (Rs)
BSE-SENSEX 6,605 6,480 -1.9% 6,955 / 4,228
S&P CNX NIFTY 2,068 2,031 -1.8% 2,183 / 1,292
COLGATE 182 191 4.9% 215 / 102
ZEE 138 144 4.4% 189 / 100
ITC 1,353 1,400 3.5% 1,417 / 812
TATA CHEM 152 155 2.4% 175 / 94
SHIP. CORP. 152 155 2.3% 188 / 61

However, the party was not to last for long. After the markets remained rather apprehensive for most part of Thursday, the bears finally decided to have it their way. And this was not restricted to Thursday alone as the bear party continued well into Friday's trade. The Sensex lost nearly 3% within a span of two trading sessions from its intra-day highs on Thursday. Profit booking was largely witnessed across sectors. However, it must be noted that the selling seemed to have largely emanated from the domestic non-institutional camp of investors (including retail investors), as both - the FIIsand mutual funds (MFs) - had been net buyers in the first 4 trading sessions of the week putting in Rs 5 bn and over Rs 1 bn respectively.

Key losers over the week (NSE-50)
Company Price on
Apr 1 (Rs)
Price on
Apr 8 (Rs)
%
Change
52-Week
H/L (Rs)
TISCO 409 381 -6.9% 447 / 155
M&M 506 476 -5.8% 574 / 360
TATA POWER 362 342 -5.6% 430 / 213
INFOSYS 2,236 2,128 -4.8% 2,423 / 1,031
MARUTI 431 412 -4.4% 600 / 300

While there was no specific reason that could have led to investors staying on the sidelines and taking some profits off the table, it seemed largely the adoption of a cautious stance towards equities until a few India Inc. results start to flow and some clarity emerges on the broader earnings front. It must be noted that next week is slated to witness some key corporate results' announcements that include those of MphasiS BFL, Hero Honda, HDFC Bank, Infosys, ABB and Geometric Software.

Now, considering some key sector/specific developments during the week:

  • Crude oil prices continued to grab headlines as they breached the US$ 58 per barrel mark on Monday making markets across the globe jittery. However, a quick announcement by OPEC members that they would increase oil supply by the end of this month and a surprise rise in US oil inventories led to a sharp correction in crude oil prices, which have retreated to US$ 54 per barrel levels. Nonetheless, with India and China continuing with their strong growth along with the recovery in the US, has led to concerns with respect to the possibility of higher crude oil prices sustaining, which has the potential to retard world growth. It must be noted that as per estimates, a US$ 5 per barrel rise in crude oil prices could slow India's GDP by 0.5% and also raise inflation by about 1.7%, which in turn could pressure on domestic interest rates. This is because India imports nearly 70% of its crude oil requirements.

  • The impact of all this was felt on oil marketing companies like HPCL (up 1%), BPCL (down 1%) and IOC (up 1%) in the domestic market. These stocks continued to be the victims of volatility on the bourses as news regarding a possible hike in petroleum product prices re-surfaced on Wednesday and seemingly died down on Friday. During the week, news that India's Planning Commission was of the view that domestic fuel prices should be aligned to the global crude oil prices, which are expected to remain firm going forward, provided some support to these stocks. It must be noted that hiking domestic fuel prices eases the pressure on the margins of the oil-marketing majors and hence the optimism. However, the cabinet meeting held on Friday refrained from announcing any price hike. It must be noted that though international crude oil prices have been trading at record levels, domestic fuel prices have not been raised since November 2004, thus affecting the profitability of oil-marketing majors.

  • Auto stocks continued their dismal performance on the bourses with M&M and Maruti being among the key losers amongst Nifty stocks this week. Rising crude oil prices was the key sentiment spoilers, as going forward; an imminent rise in domestic oil prices would adversely affect the volume sales of auto companies. Further, it must be noted, that the margins of auto companies would also remain under pressure considering the rise in input costs like those of steel and tyres. Consequently, some of the key auto manufacturers have already hinted at a price hike going forward.Other losers in the sector

Going forward, while the outcome of the India Inc. financial performance scorecard would decide the market movements in the near-term, we would advise investors to take a long-term approach while investing. While investment in equities was never risk-free, this is compensated for by the higher returns. The risks can surely be mitigated to a large extent by following a disciplined, staggered and fundamental investment approach, which is an optimum strategy, especially for a retail investor, for whom, preservation of capital is as much important as earning decent returns on the same. Happy investing!


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