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Software dictates terms - Views on News from Equitymaster
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  • Apr 23, 2005

    Software dictates terms

    Robust March quarter results, positive news on the monsoons front and reduced <>FII selling helped the markets recover this week from the dreadful sell off that was witnessed last week. Led by buying amongst index heavyweights, the benchmark indices staged a comeback with the <>BSE Sensex and <>NSE Nifty gaining 1% and 0.2% respectively. However, the gains should not be construed as if everything was well for the markets during the week.

    Shaky sentiments on the back of the heavy bout of profit booking witnessed on Friday (Sensex down 220 points as FIIs were net sellers to the tune of Rs 5.7 bn) last week led to a considerably weak opening on Monday with the Sensex seemingly headed towards the 6,100 mark. Continued bottom fishing at these lower levels, however, helped control the slide and the indices slowly but steadily pared its losses. But, akin to the recent past, a strong bout of selling pressure in the closing hour of trade pushed the markets back to lower levels. On this day, while FIIs sold Rs 4.6 bn worth of equity, domestic MFs, which hold a considerable amount of cash owing to the recent spate of MF IPOs, put in Rs 2.3 bn, which seemingly supported the markets at lower levels.

    Tuesday was a different story altogether, as investors lapped up stocks at lower levels in early trades taking advantage of the slide over the previous couple of trading sessions. But even this strength was short-lived as below-than-expected numbers by India's largest software company, TCS, turned sentiments sour on the bourses. The impact of this was particularly felt on the Nifty as TCS, which witnessed a massive round of selling, has a significant weightage on the index. This was precisely the reason that kept the Nifty gains subdued on Wednesday as TCS continued its slide. The Sensex ended the trading session with over a 100-points gain on this day. However, it must be noted that Wednesday's strength was seemingly a factor of retail participation as FIIs (Rs 2.3 bn) and MFs (Rs 200 m) were both net sellers on this day. The market strength continued well into Thursday and Friday's trade as good March quarter numbers continued to pour in, lending support to investor sentiment. Some leading companies declared their results this week, prominent among them being Gujarat Ambuja, Nalco, TCS, Wipro, Satyam, UTI Bank and Reliance Energy. For our analysis on all these results and more, click here.

    Further, during the week, meteorological department's forecast of expected normal monsoons seemed to have also provided some relief to investors. This is because, with nearly 65% of the Indian population dependant on agriculture for livelihood, monsoons play a critical role for our country. Though agriculture contributes to only about 25% of India's GDP, with the balance coming from manufacturing (25%) and services (50%), the importance of monsoons needs to be understood in the context that rural spending is important for propelling the demand for various goods and services in the country, which in turn would aid the country to notch growth rates of about 6% to 7%.
    Company Price on Apr 15 (Rs) Price on Apr 22 (Rs) % Change 52-Week H/L (Rs)
    BSE-SENSEX 6,248 6,347 1.6% 6,955 / 4,228
    S&P CNX NIFTY 1,956 1,967 0.6% 2,183 / 1,292
    MARUTI 405 439 8.6% 600 / 300
    SUN PHARMA 462 495 7.3% 575 / 278
    TATA MOTORS 410 437 6.6% 528 / 300
    WIPRO 606 644 6.3% 775 / 396
    COLGATE 191 203 6.3% 215 / 102

    Now let us consider some sector/stock specific news this week.

    • TCSwas on the receiving end of investor ire this week, with the stock having lost over 15%. This was owing to the company reporting lower-than-expected March quarter numbers. It reported a flat QoQ topline growth and a 34% decline in profits for the March quarter. This was partly on account of an additional Rs 1 bn payout to employees as incentive. Though sentiment on the stock looks negative currently, we believe that it was just an overreaction by market participants. However, as far as other software stockswere concerned, after the hammering of the past few days, these were in the reckoning this week with Wiproand Satyam being the key gainers in this pack on the back of good March quarter and full year numbers.

    • After acquiring Singapore's NatSteel, which has a capacity of 2 MT, Tisco is in talks with the National Iranian Steel Company to acquire its 3 MT steel plant. Initially, the company is negotiating to acquire a management contract to take over the operations of the plant and thereafter it intends to acquire the control of the plant. It should be noted that the management was contemplating either setting up a new plant or acquiring plants overseas to achieve its objective of having a production capacity of 15 MT by 2010. Notably, this plant has its own source of iron ore (an essential raw material) in the northern part of Iran. The stock ended the week with a 1% loss. Other steel stocks

      Key losers over the week (NSE-50)
      Company Price on Apr 15 (Rs) Price on Apr 22 (Rs) % Change 52-Week H/L (Rs)
      TCS 1,319 1,167 -11.5% 1,475 / 959
      ABB 1,297 1,215 -6.3% 1,349 / 491
      DR. REDDY 712 682 -4.2% 942 / 650
      SAIL 59 56 -4.2% 70 / 21
      OBC 301 289 -3.8% 382 / 149
    • 3i Infotechmade a lacklustre debut on the Indian bourses on Friday. The stock had a poor opening (up about 8% on the BSE) though a stray trade on the NSE saw the stock register a high of Rs 118, up 18% over its offer price of Rs 100 per share. However, continued profit booking saw the stock erode most of its gains and end the trading session with mere 1% gain. 3i Infotech is an IT company focusing mainly on the banking, financial services and insurance (BFSI) vertical. It was incorporated in 1993 as a back-office IT services provider to the ICICI Group and has since metamorphosed into a technology company providing IT services and solutions to over 500 clients in over 30 countries. The company earns revenues from products as well as IT services (to BFSI verticals). Its strategy is different vis--vis other software companies, as it is mainly focused on India and earns the largest proportion of its revenues from India.

    • The abolition of the quota system from the start of this year has been a boon for Indian textile exports. In the months January and February 2005 together, exports in value terms to the US have soared by a whopping 25% YoY. China leads the pack, having clocked an impressive 125% growth in its exports to the U.S. Going forward, considering the immense opportunities available for the Indian textile industry with the overseas markets having opened up, textile players having vertically integrated set-ups are likely to benefit. Textile stocks during the week

    Going forward, next week being the peak of the results season, market movements would largely depend upon the results doled out by India Inc. Further, with expectations once again doing the rounds that petroleum product prices would be hiked, market participants might keenly watch the inflation numbers in the near-term, which were at 5.48% for the week ended April 9, 2005, higher than the previous week's 5.26%. This is because these levels have been achieved despite no increase in petroleum product prices and if petrol and diesel prices were to increase by about Rs 3 per litre, as being demanded by oil marketing majors, it could well dent the government's efforts at reigning in inflation at about 5%. However, an optimum way to beat most of these uncertainties and market volatilities, we believe, is to invest systematically with a long-term horizon. Happy investing!



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