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They came, saw and conquered! - Views on News from Equitymaster
 
 
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  • Apr 22, 2006

    They came, saw and conquered!

    Stop wondering! We are talking about the Foreign Institutional Investors (FIIs) here. Incessant money (almost US$ 11 bn) brought in by this investor community over the last year (not this week though) into the mutual funds (MFs). The Indian stock markets gained a sensational 7% this week, the largest since the current bull-run began in April 2003. While the Sensex seems to have intentions of bracing the stars, the mid-cap and the small-cap indices too are aiming for the moon, as they logged in gains of 5% and 4% respectively.

    After last week's losses, the markets opened the week with a bang, as investors were enthused by Infosys' results and the guidance doled out by the company for FY07, taking the stock up by as much as 7% on Monday, initiating a chain reaction across technology stocks. Considering that tech stocks have a significant weightage on the BSE-Sensex (about 18%), the euphoria was reflected on the index, which gained over 300 points. The story was repeated the following day, with the Sensex once again clocking in gains of over 280 points, this time led by TCS (up by as much as 5% on Tuesday) and other software stocks. Wednesday was no different from the previous two trading sessions, as another tech major, Wipro, met market expectations. However, the difference in this trading session was that after the initial euphoria, software stocks across-the-board witnessed profit booking. Nonetheless, the Sensex managed to hold on to most of its early gains (up 74 points), thanks to the strength witnessed in metal, cement and petrochemical (chiefly Reliance) stocks.

    While the first two trading sessions belonged to the software stocks and Wednesday belonged to Reliance in part (up 3%), Thursday's trading session was controlled by Reliance Industries almost single-handedly. The news of the KG basin gas find led to investors scrambling for the stock, as it gained almost 8%. This move by the Reliance stock has a significant bearing on the markets, considering the fact that it has a 10% weightage on the index. This implies that roughly, the 8% move by Reliance would have contributed almost 100 points to the Sensex gains, which gained 144 points on Thursday. However, compared to the astonishing rally of the previous four trading sessions, Friday's trading session was marred by intense intra-day volatility (240 points), with the markets closing almost flat. Thus, at the end of the week, the benchmark indices had gained a huge 7%.

    However, amidst all this sector/stock specific activity, it must be noted that history was created on the Indian bourses during the week, Thursday to be precise, as the Sensex breached the psychological 12,000-mark. Moreover, despite substantial profit booking on Friday, the markets recovered on the back of bottom fishing at lower levels, as the Sensex held on to its 12,000+ mark.

    On the institutional front, domestic MFs, which have been sitting on cash, continued to deploy a part of it, with their net investments in the first four trading sessions of the week being Rs 4.7 bn. FIIs, on the other hand, were net buyers to the tune of only Rs 28 m during this period post their alternate bouts of buying and selling on the bourses. However, apparently, since a significant chunk of institutional money may have gone into software stocks and Reliance, the impact of this on the benchmark indices was quite prominent.

    Top gainers over the week (NSE-50)
    Company Price on
    Apr 13 (Rs)
    Price on
    Apr 21 (Rs)
    %
    Change
    52-Week
    H/L (Rs)
    BSE-SENSEX 11,237 12,030 7.1% 12,102 / 6,138
    S&P CNX NIFTY 3,346 3,573 6.8% 3,593 / 1,896
    TATA STEEL 565 654 15.9% 666 / 329
    RELIANCE 847 975 15.2% 1,008 / 412
    GRASIM 2,088 2,400 15.0% 2,430 / 1,010
    IPCL 248 282 14.0% 291 / 158
    RANBAXY 450 505 12.3% 568 / 339

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

    • Software stocks had a big-bang week, aided by robust FY06 results and FY07 guidance announced by Infosys (up 9%). This strong guidance clearly reflects the management's confidence in the overall demand environment in the global IT space. Investor sentiments were also boosted by the announcement of the 1:1 bonus issue and Rs 45 per share dividend for FY06 (including Rs 30 per share special dividend). As far as the other IT stocks were concerned, while TCS (up 11%) and Satyam (up 5% for the week) both announced 1:1 bonuses for their shareholders and reported good FY06 numbers, Satyam was hit on Friday (down 7%) owing to a relatively poor guidance for FY07. Other software stocks

    • Reliance (up as much as 15%) struck oil in the D-6 block of the Krishna-Godavari (KG) Basin. The oil find, which is the first in the KG basin, is estimated to have reserves of 1 bn barrels. At a 45% recovery rate, these reserves are estimated to generate revenues to the tune of US$ 1.8 bn every year for 15 years. However, it is likely to take at least 4 years for the production to begin. Given that India imports around 70% of its crude requirements and considering the rise in global crude prices, the news is a positive for the company. In related news, the Reliance Petro IPO, promoted by Reliance Industries, was oversubscribed as many as 51 times, in the process, garnering bids worth over US$ 30 bn, the largest by any primary/secondary IPO in the country. Other energy stocks

    • Pharma major, Ranbaxy (up as much as 12%), announced decent results for the March quarter. Further, it intends to hive off its research and development (R&D) division into a separate company in order to facilitate easy access to funds and offset high cost development risks. Considering that Ranbaxy spends around 6% of its sales on research and development, this move is likely to mitigate the risks involved in R&D for Ranbaxy, as there is a possibility that new partners could be inducted in the hived-off R&D company (something similar to what Dr. Reddy's has done). This would thus, contribute to margin expansion going forward for Ranbaxy. Other pharma stocks

      Top losers over the week (NSE-50)
      Company Price on
      Apr 13 (Rs)
      Price on
      Apr 21 (Rs)
      %
      Change
      52-Week
      H/L (Rs)
      BPCL 450 427 -5.1% 474 / 339
      JET AIRWAYS 972 959 -1.4% 1,383 / 773
      GAIL 310 306 -1.2% 326 / 199

    • M&M (up 6%), the largest UV and tractor manufacturer in the country, is reportedly in talks with Malaysia-based Proton for a manufacturing and marketing tie-up. The arrangement could be for assembly for M&M's 'Scorpio' and 'Bolero'. The deal, if it goes through, would be a positive for the company, as this would facilitate M&M's efforts to diversify in the international arena. In related sector news, Tata Motors (up 8%) has entered the South African market. In the first year, the company expects to sell over 5,000 units and aims to grow the business by around 35% per annum. The move is a positive for the company, as this will enable it to further expand its geographical reach. However, revenues from this stream are not expected to be significant in the initial years. Other auto stocks

    While the cautious (those who follow valuations), the pessimists (the bears) and even the optimists (the bulls themselves) would be surely surprised by the Sensex movements over the last 4 months (up 28%), the fact remains that the markets continue to scale new peaks. Abundant liquidity, both global and domestic, has been the single biggest reason for the markets continuing to make inroads into higher territories.

    Currently, the Sensex trades at almost 22 times its trailing 12-months earnings (about 18 times on FY07 basis), which is rather unattractive from an investment point of view, more so for global investors, considering the fact that many other emerging markets are available at better valuations despite their lower growth forecasts. However, the fact that most of the results declared so far have been in-line or above expectations, have provided the bulls with another reason to continue to pump in money into Indian equities. However, we would continue to advise utmost caution to investors, as stocks have discounted valuations of the next 4 to 6 quarters, which makes it a rather risky proposition to invest at the current juncture, as any financial disappointments by India Inc could have serious negative repercussions on investors' portfolios. Happy and safe investing!

     

     

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