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Bulls take an interval...

May 13, 2006

It was roller coaster ride for the Indian stock markets this week. After having gained in 9 consecutive trading sessions, treading about 7% higher in this period, the indices went into a sort of a free-fall in the latter part of this week. While this was attributed to reasons like high crude oil and commodity prices adversely affecting global inflation, with the hike in Fed rates and the Left parties (believed to be non-reformists) witnessing a thumping victory in the recently concluded state elections, the fact that the Indian stock markets had witnessed a breathtaking run was enough reason for the bulls to lighten up a bit. The markets began on a strong note this week having gained 10% in the previous 3 weeks. There was no sign of fatigue amongst market participants as they continued to buy stocks even at record highs. This strength sustained throughout the day, as the bears were forced into hibernation. During the course of Monday's trade, the BSE-Sensex crossed the 12,500-mark, hitting its highest-ever intra-day level (12,511), and also closed at its all-time high close. However, the trading session on Tuesday saw some tug-of-war between the bulls and the bears. Adamancy on the part of the bulls to bring the markets out of the trough yielded results, as the benchmark indices ended the day with respectable gains, having witnessed an intra-day volatility of 190 points (Sensex). The recovery witnessed in the latter half of Tuesday spilled over into the following day's trade, with the Sensex crossing another landmark of 12,600!

However, Thursday and Friday's trading sessions were a different ballgame altogether, diagonally opposite to the euphoria witnessed in the first half of the week. The markets opened weak on Thursday, which seemingly was partly a result of the Fed's decision to hike interest rates by 0.25% to 5%, the 16th successive rise in the last 22 months. While this could have raised fears, once again, of Foreign Institutional Investors (FIIs) pulling out of emerging economies to safer havens like US treasury bonds, record high global commodity prices (crude oil, aluminium, copper, zinc, etc) adversely affecting global inflation and the Left parties victory all collectively fanned investor fears. The Sensex lost 177 points on Thursday. The weakness continued into Friday's trading session also with the Sensex ending the day down 150 points, thus giving up more than the gains garnered in the previous three trading sessions.

Nonetheless, considering that the markets were on the upmove in the first half of the week and collapsed only in the second, the Sensex and the NSE-Nifty ended the week with a marginal loss of about 0.5% each. However, despite the sell-off, the BSE Mid Cap and the BSE Small Cap Index ended the week with 0.6% and 2.3% gains, indicating that profit-booking was largely witnessed in the large-cap stocks. As far as the institutional activity this week was concerned, while FIIs were net sellers to the tune of Rs 500 m in the first 4 trading sessions of the week (Friday's numbers available only on Monday), domestic mutual funds (MFs) bought equities worth Rs 4.4 bn in this period.

Top gainers over the week (NSE-50)
COMPANY Price on May 05 (Rs) Price on May 12 (Rs) % CHANGE 52-WEEK H/L (Rs)
BSE-SENSEX 12,360 12,285 -0.6% 12,671 / 6,381
S&P CNX NIFTY 3,666 3,650 -0.4% 3,774 / 1,965
DABUR 156 171 9.3% 174 / 60
HDFC 1,287 1,381 7.3% 1,420 / 736
HINDALCO 230 243 5.6% 251 / 107
ONGC 1,365 1,421 4.1% 1,514 / 810
L&T 2,734 2,838 3.8% 2,909 / 1,003

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

  • Reliance Petroleum (RPL) made its debut on the bourses this week at Rs 101.95 (70% premium to its issue price of Rs 60 per share) and ended the week with a 40% premium over its allotment price. RPL is a Reliance Industries Limited (RIL) group company. Considering the fact that RPL is setting up a 29.4 MMTPA (million metric tonnes per annum) refinery in the SEZ (special economic zone) in Jamnagar, Gujarat, it is a start-up company in that sense. The refinery is scheduled for completion by December 2008. Once the refinery is completed, it will be the sixth-largest refinery in the world. Amongst the other Mukesh Ambani Group stocks, while RIL and IPCL lost 3% each this week, Reliance Infrastructure ended 28% higher.

  • Dabur was the top gainer this week with 9% gains. These gains were supported by reports that the ayurvedic major is planning to acquire a FMCG company in the US. It can be recollected that Dabur had earlier acquired Redrock International in Dubai, a couple of years ago. This is a positive for Dabur as with this acquisition, it will get access to an existing distribution network, through which it can market its natural products in US. Also, it can acquire a bouquet of brands, which will aid its existing product portfolio. Other FMCG stocks.

    Top losers over the week (NSE-50)
    COMPANY Price on May 05 (Rs) Price on May 12 (Rs) % CHANGE 52-WEEK H/L (Rs)
    BPCL 484 431 -11.1% 505 / 339
    GUJ. AMBUJA 118 106 -10.1% 128 / 49
    ACC 988 897 -9.1% 1,063 / 354
    GRASIM 2,418 2,252 -6.9% 2,609 / 1,010
    MTNL 217 205 -5.6% 229 / 108

  • Cement stocks were the bear favourites this week (as can be seen in the table above). This was on account of the fact that the government has asked cement manufacturers to take voluntary steps to control cement price hikes. The government has warned of action against cement manufacturers if they fail to comply with the directive and has given them time till Monday to inform about the steps to be taken by them to control prices. The government apparently does not favour cement manufacturers earning super profits. It has reportedly asked them to raise cement prices in proportion to the rise in input costs.

  • IOC, BPCL and HPCL, the three oil marketing PSU's, continue to face the brunt of high global crude oil prices. They are expected to bear significant losses due to under recoveries on petrol, diesel, LPG and kerosene prices. It should be noted that oil-marketing companies share a significant part of the subsidy burden. This fate of oil marketing companies is despite the bonds issued by the government to provide them some cushion against the mounting subsidy burden. Further, with the Left parties apposed to any price hike, a cloud of uncertainty hovered over the financial fate of these companies. Energy stocks this week.

To conclude, considering this week's behaviour, the one question that comes to mind is, are the bulls tired or is it just a temporary phase as they pause for breath before resuming their journey? Well, while we do not make any directional calls for the markets for the near-term, anybody who claims he can, is probably betting big on luck to support his call, as nobody knows what FIIs/MFs are going to do in the next week or month. However, what we can definitely say is that though investing at the current levels is froth with risks, as we find the markets to be fairly valued for the next 12-18 months, over the long-term (3-5 years), there are no second thoughts on the direction of the Indian stockmarkets. Though intense volatility could mark the market movements over the next few quarters, the long-term India story remains intact.

Thus, at the current juncture, the one good way to invest would be to invest in small quantities at pre-determined regular intervals in fundamentally sound stocks with some value still left in them. We know that investment ideas at the current levels are difficult to come by, but a little bit of hard work and extra research could help you recognise a few of them. This type of investing pattern would not only help an investor to be a part of the rally (if and until it continues), it would also protect him from over-exposing to equities at the current historic high levels and would thus protect him from getting severely hurt in case of correction. Moreover, even if a correction comes by, the investor would not have to worry on account of his fundamentally safe investments. Happy and safe investing!


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