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Profit-booking time...

Apr 15, 2006

It was profit booking time for FIIs on the bourses as they just dumped stocks across the board and took some profits off the table this week. This week's trade would have definitely given a chill to even the most seasoned market player. While the 3%-odd correction for the holiday-shortened week was not the reason that created panic on the bourses, it was the volatility during the week that took everybody by surprise. The situation was not much different in the mid-cap and small-cap segments of the market, as the weakness this week was witnessed across-the-board. Thus, at the end of the week, while the BSE Mid Cap Index lost 3%, the BSE Small Cap Index was down 2%. With the losses this week, the 6-week rally in the Indian stock markets came to a halt.

The markets continued from where they left off last week. Last Friday saw the Sensex lose over 150 points after having made lifetime highs (11,931) earlier in the day. Considering that the BSE-Sensex had already corrected over 3% from its peak on Friday, trading resumed on Monday on a buoyant note, as market participants opted to do some bottom fishing at these lower levels. Though profit-booking was witnessed during the day at higher levels, which pushed the Sensex into the red, the final hour of trade saw the bulls take complete charge of market proceedings, as the markets staged a smart rally of sorts.

However, the regained momentum of Monday failed to last long. After the brief recovery witnessed on Monday, (Tuesday was a holiday) the indices fell like ninepins in the following two trading sessions amidst heavy profit-booking by FIIs. Despite the reasonably good results during the week, investor sentiments failed to revive, as they pressed the 'sell' button. The panic on the bourses can also be gauged from the severity of the Sensex's fall, which continued to slide unabated. In fact, after collapsing by over 300 points on Wednesday, the Sensex was kissing the 11,000-mark by Thursday noon, which is a good 8% off its lifetime highs (11,931) achieved mere 3 trading sessions ago.

However, it was at these levels that things seemed to have stabilised a bit, as investors (both institutional and retail), who were sitting on some cash, opted to deploy the same, thus lending support to the indices. In fact, the resumption of buying at lower levels helped the Sensex recover much of Thursday's lost ground, as it clawed back from the near 11,000 levels to end the day and week (Friday being a holiday) at 11,200-odd levels, 3% lower than the previous week's close.

As far as the institutional activity this week was concerned, both Foreign Institutional Investors (FIIs) and mutual funds (MFs) were net sellers. FIIs sold equities worth Rs 21 bn (Rs 25.3 bn since last Friday, including provisional numbers of Rs 9.5 bn net sell) in the three trading sessions of the current week. This is a significant (14%) chunk of the Rs 183 bn that they had pumped into Indian equities this year until April 5, 2006 (the day before they turned sellers). This sell-off by the FIIs has been the largest in the last one year at least (see chart above). Domestic MFs were also net sellers to the tune of Rs 1.3 bn. It must be noted that no provisional number was available for MFs pertaining to Thursday's trade.

Top gainers over the week (NSE-50)
Company Price on
Apr 7 (Rs)
Price on
Apr 13 (Rs)
H/L (Rs)
BSE-SENSEX 11,589 11,237 -3.0% 11,931 / 6,118
S&P CNX NIFTY 3,455 3,346 -3.2% 3,556 / 1,896
TATA STEEL 541 565 4.4% 618 / 329
HINDALCO 187 192 2.8% 202 / 107
DR. REDDY 1,438 1,474 2.5% 1,517 / 605
RELIANCE 833 847 1.6% 859 / 410
ACC 887 898 1.3% 953 / 354

Now let us consider some stock specific developments this week:

  • ACC announced enthusing results for the March quarter (1QCY06) this week, wherein it reported a 19% YoY growth in topline. Helped by a strong improvement in operating margins (up 890 basis points YoY), the bottomline increased by 42% YoY. However, adjusting for the tax write-back in the corresponding quarter of last year, the PAT growth has been as much as 101% YoY. Strong volume sales and a significant improvement in realisations have helped the company deliver this performance. Further, with the stated brownfield expansion plans and de-bottlenecking, its total production levels would increase to 21 MT by 1QCY07, up from the current 19 MT. The stock managed to buck the trend and was up 1% this week. Other cement stocks

    Top losers over the week (NSE-50)
    Company Price on
    Apr 7 (Rs)
    Price on
    Apr 13 (Rs)
    H/L (Rs)
    VSNL 487 427 -12.4% 516 / 178
    CIPLA 725 652 -10.1% 760 / 212
    SBI 980 918 -6.3% 1,015 / 574
    NALCO 311 292 -6.2% 322 / 139
    ICICI BANK 600 563 -6.1% 640 / 356

  • SBI (down 7% on BSE), the largest bank in the country, lost considerable ground this week. This was seemingly the fallout of the wage settlement agreement between SBI's management and its striking employees. As per the agreement, there has been a significant increase in the pension liability of the bank. The minimum pension scale has been increased by around 70% to Rs 10,500 per month. This could adversely impact the cost-to-income ratio of the bank, which has been improving from 55% in FY04 to 50% in the current fiscal. It should be noted that the bank has a workforce of more than 0.2 m employees. Other banking stocks

  • Bajaj Auto (down 3%), the second largest two-wheeler manufacturer in the country, has launched a new motorcycle, 'Platina', in the entry segment (100 cc). The company has aimed to register sales of 50,000 units in the current month and scale it up to 75,000 units in the next two months. The move is a positive, as this will enable the company to withstand increasing competition in the entry-level segment. It should be noted that since the last few months, its existing entry-level motorcycle, 'CT 100', has been facing heightened competition. The new motorcycle, together with 'CT 100', is expected to enable the company to regain its lost ground. Other auto stocks

Going forward, the markets are expected to take their cues from India Inc's March quarter results. While the curtain raiser in terms of the first few results this week was encouraging, next week would be an important one, especially for technology stocks, as a slew of IT companies are due to declare their results, which include Infosys (on Friday this week), Wipro, HCL Tech and 3i Infotech. There are some other key results lined up as well next week, which include HDFC Bank, Ranbaxy, UTI Bank and Marico, among others.

It must be noted that markets are already at their historic highs (notwithstanding the correction this week) and we believe that from hereon, any 'sustained' upsurge in the markets would hinge on the deliverables from India Inc. Since expectations (both return on equities as well as earnings of corporate India) are on the rise, in the eventuality of earnings growth not meeting these expectations, there could be a sharp re-adjustment (read correction) in valuations. Investors, in this context, should take the risk-return perspective into consideration before investing in equities at the current levels. However, we would advise investors to overlook the short-term market/stock movements and look at the long-term prospects of companies, rather than basing one's investment decisions on the quarterly performance of companies, which could be volatile. Happy and safe investing!

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