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Dancing to the FII tunes - Views on News from Equitymaster
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  • Apr 30, 2005

    Dancing to the FII tunes

    After the brief recovery witnessed last week, the indices tanked this week amidst heavy unloading by Foreign Institutional Investors (FIIs). Despite the continued flow of good corporate results during the week, investor sentiments failed to revive as they pressed the 'sell' button. The benchmark indices lost about 3% each with selling witnessed across sectors. Though domestic mutual funds (MFs) lend support, they seemed feeble in front of the FII might.

    After positing gains during the previous week, markets opened on a cautious note this week. Monday saw the benchmark indices opened rather subdued on the back of unfavourable global cues, particularly pertaining to the US markets. Though the indices managed to recover ground and close in the positive, thus marking the fourth consecutive day of gains, the optimism was not to last for long. Market participants took advantage of the rise in the markets over the last few days to book profits on Tuesday and Wednesday.

    Though Thursday's trade saw the indices notch marginal gains, the news of US GDP growth for the first quarter at 3.1% (slowest in last 2 years) against expectations of 3.5%, seemingly led to fears among investors of the impact of a US slowdown on world economies. Moreover, with the US interest rates hardening, fears that FIIs 'may' re-consider putting some of their money back into US bonds, which are safer compared to investing in emerging markets also affected sentiments. Not only this, Friday's trade saw banking stocks take it on their chin amidst a strong wave of selling pressure, which was attributed to the hike in the reverse repo rate announced in RBI's Monetary Policy indicating a possible rise in interest rates. As far as the FII and MF activity was concerned this week, FIIs were net sellers to the tune of Rs 5 bn in the first 4 trading sessions of the week against the Rs 3 bn put in by domestic mutual funds.

    Key gainers over the week (NSE-50)
    Company Price on
    Apr 22 (Rs)
    Price on
    Apr 29 (Rs)
    H/L (Rs)
    BSE-SENSEX 6,347 6,154 -3.0% 6,955 / 4,228
    S&P CNX NIFTY 1,967 1,903 -3.3% 2,183 / 1,292
    CIPLA 245 264 8.0% 322 / 194
    VSNL 198 209 5.4% 252 / 110
    HLL 132 138 4.0% 170 / 101
    ITC 1,394 1,438 3.2% 1,474 / 812
    DABUR 114 116 2.2% 145 / 60

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

    • The RBI released the Monetary Policy for 2005-06 on Thursday, wherein it has kept the bank rate and the cash reserve ratio (CRR) unchanged. However, the reverse repo rate has been increased by 25 basis points from 4.75% to 5%. Besides these, there have been no changes to the priority sector lending norms and the suggestions regarding increasing the scope of lending have been put on hold for further considerations.

    • Banking stocks fell like ninepins this week with interest rate concerns looming large on investor sentiments. Despite RBI's efforts of dousing the inflation-related apprehensions, by the instigating marginal variations in monetary parameters, the same failed to wipe away the qualms from investors' minds. While the 25 basis points increase in reverse repo rate (rate at which RBI borrows from banks) is only indicative of short-term interest rate hike, we do believe that an upside to bank lending rates is inevitable. This is primarily because in the event of government fulfilling its borrowing programme and the current credit growth rate chugging along, liquidity is bound to come under pressure. So although the monetary policy may be made a scapegoat, the long-term interest rate concerns are not unfounded.

      Key losers over the week (NSE-50)
      Company Price on
      Apr 22 (Rs)
      Price on
      Apr 29 (Rs)
      H/L (Rs)
      HCL TECH 370 335 -9.5% 407 / 245
      ICICI BANK 396 360 -9.2% 430 / 212
      NALCO 160 147 -8.6% 209 / 95
      PNB 377 346 -8.1% 520 / 212
      MARUTI 439 406 -7.5% 580 / 300

    • HCL Tech was the biggest loser amongst index stocks (see table above). Apart from the overall market sentiments, the selling pressure in the stock could be attributed to the un-interesting set of numbers delivered by the company wherein it reported a 22% QoQ growth in bottomline on the back of a 7% topline growth for the March quarter. However, operating margins fell by 20 basis points during this period. Most other software stocks closed with losses this week.

    Apart from the above, there were some important results that were declared during the week, which included those of Reliance, HLL, Cipla, Bharti Tele, BHEL, Dabur, Ranbaxy, Ashok Leyland, Raymond, Zee and Grasim. For our detailed analysis on all these results and more, kindly click here

    Going forward, with many (not all) of the key India Inc. results now out of the way, investors would now get back to their number crunching game and re-focus on the future of these companies. While the current market valuations of 11 times one-year forward earnings does not seem expensive, the challenge for India Inc. to deliver from hereon would stand increased considering a scenario of hardening interest rates, stronger fuel prices and no relief on the inputs front as commodity prices continue to hold ground. Further, another important parameter that would now come under investor radar would be the onset of normal monsoons in about a months time from now, which could set the stage for continued demand or provide a setback in the event of abnormal/uneven rains.

    However, we continue to believe that the India story is not over and staggered investments with 3 to 5 years investment horizon is a sound approach to mitigate the impact of most risks. We feel that fundamentals do not change by the day, week or month. If the fundamentals and performance of the company are strong, markets will acknowledge the same in due course of time. Happy investing!



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