Banking boost to the markets!

It was a week where banking stocks came out all guns blazing and in the process, played a major part in propping up the indices quite handsomely during the week. Thus, for the week ended May 18, 2007, while the BSE-Sensex edged higher by near 4%, gains in NSE-Nifty were a tad lower at around the 3% mark.

The week is likely to go down in history as the week of the banking stocks. Just to put things in perspective, on the Nifty, four out of the top five gainers for the week were banking heavyweights. With a lot of banks announcing capital raising plans, investors made a beeline for the sector stocks. This optimism rubbed off on other counters also, indicated by the strong gains notched up by both the benchmark indices during the week. Furthermore, unlike the trend in the previous weeks where the fate of the indices was increasingly being decided by huge movement on either side in just one day, the rally this week was spaced out. Sensex, the BSE benchmark, clocked gains in the region of 200 points on three days out of five and for the remaining two days, moved marginally on either side of the break even. With investors getting increasingly edgy over the past few weeks, the gains couldn't have come at a better time.

On the institutional activity front, both the Foreign Institutional Investors (FIIs) and domestic mutual funds turned out to be net buyers, increasing their exposure by Rs 3 bn and Rs 10 bn respectively.

(Rs m)	MFs	FIIs	Total
11-May	1,007	(3,362)	(2,355)
14-May	400	605	1,005
15-May	(778)	(3,308)	(4,086)
16-May	3,356	(1,392)	1,964
17-May	6,075	10,608	16,683
Total	10,060	3,151	13,211

On the sectoral indices front, not surprisingly, it was the 'Bankex' that came out on top and that too by a wide margin. It edged higher by 10% during the week, with the oil and gas sector coming a distant second, despite recording sizeable gains of 6%. Infact, except for the IT and the auto index, which bore the brunt of a huge sell off in Bajaj Auto, all the other indices closed in the positive territory. As mentioned earlier, with banking stocks occupying three out of the top five positions in the Sensex 'top gainers of the week' list, the sector index rose to the top spot.

Index	As on May 11	As on May 18	% Change
BSE BANKEX	6,905	7,604	10.1%
BSE OIL AND GAS	7,189	7,603	5.8%
BSE PSU	6,395	6,699	4.8%
BSE FMCG	1,799	1,873	4.1%
BSE MIDCAP	5,851	6,090	4.1%
BSE SMLCAP	6,984	7,220	3.4%
BSE METAL	10,066	10,242	1.8%
BSE HEALTHCARE	3,680	3,734	1.5%
BSE IT	4,924	4,923	0.0%
BSE AUTO	5,023	4,910	-2.2%

Let us have a look at some key company/sector specific developments during the week:

The announcement of muted margins and creation of three new entities did not enthuse investors as the stock of Bajaj Auto closed lower by as much as 16% during the week and that too when most of the other heavyweights edged higher. Its peer Hero Honda also lost 3% during the week. More than the results, it was the demerger announcement that took its toll on Bajaj Auto's share price. The holding company structure of the demerger has not gone down well with the investors. Further, there is a possibility that its insurance business partner Allianz may hike its stake in the venture, at a price, which would result into value dilution for Bajaj Auto's shareholders. These two developments spooked investors and they lined up to cut their positions in the counter. The company's financials are also not impressive. Owing to production constraints and cost pressures, the company has suffered a decline of 11% in net profits during the quarter on a YoY basis. There has also been a 550 basis points drop in operating margins. For the full year however, the performance has been slightly better, as while the topline has grown by 24% YoY, bottomline has grown at a lower rate of 10% YoY. Here again, it is the 280 basis points fall in operating margins that could be held responsible for the sedate bottomline show.

The parliament, this week, passed an amendment to the SBI Act allowing SBI to reduce holdings in its seven subsidiary banks to 51% from the existing 55%. The amendment also removes restriction on individual shareholding in the subsidiaries. Of the seven subsidiaries, SBI has 100% stake in State Bank of Hyderabad, State Bank of Patiala and State Bank of Saurashtra. The government has, however, clarified that it would not reduce its holding in any public sector bank below 51% and retain a majority of voting rights. The SBI group requires a capital infusion of Rs 32 bn to meet Basel-II norms and this capital cannot be infused by the government. It may be noted that SBI itself plans to issue shares with restricted or no voting rights for subscribers to its public issue scheduled later in FY08. Enthused with the news, investors lapped up the company's stocks and pushed it higher by an impressive 15% for the week. Peer ICICI Bank, also notched up gains of 12% during the week.

Steel major, Tata Steel was among the other major companies to announce its 4QFY07 and full year FY07 results during the week. On a consolidated basis, topline and bottomline have grown by 40% YoY and 19% YoY respectively during the quarter. For the full year, the same have stood at 24% and 12% respectively on a YoY basis. Here, while operating margins have fallen marginally, it is the more than 2.5 fold jump in interest expenses, which has led to the bottomline growing at a slower pace than the topline. However, the consolidated results for the quarter do not include the financials of its latest acquisition, Corus Group Plc as Tata Steel did not have “control” with regards to the provisions of the UK takeover code and the scheme. The stock edged higher by 4% during the week, while its peer SAIL edged higher 3%.

With the Sensex touching 14k levels one more time, expectations will rise again and naïve investors will resume their search for those 'multi-baggers' that would make them laugh all the way to their banks. It has been proved so many times that when 'irrational exuberance' takes over, sanity and rationality take a backseat and unfortunately, people awake when it has become too late to do so. Hence, in such times, it becomes extremely important to have a look at reality from different angles, so that the correct risk reward ratio can be gauged.