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Up for grabs! - Views on News from Equitymaster
 
 
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  • May 27, 2006

    Up for grabs!

    As is known, the last week saw significant volatility. While market participants attributed the same to unwinding of open interest positions in the futures market and margin trading-related issues, what investors are also overseeing is that many of the global markets also witnessed selling pressure. Yes, FIIs were net sellers, but domestic mutual funds were huge buyers. All in all, the last week was an acid test as far as investor confidence was concerned.

    As far as the institutional activity on the bourses is concerned, as we had mentioned earlier, Foreign Institutional Investors (FIIs) were net sellers to the tune of Rs 71.0 bn over the last five days. But at the same time, domestic mutual funds, which were sitting on cash prior to the fall in the stock market, have been opportunistic. As of April 2006, the total assets under management with the domestic mutual funds (MFs) (only growth, balanced and tax savings schemes) were Rs 247.5 bn. Assuming even 15% of this as cash holdings, the investable corpus works out to Rs 37.1 bn (the percentage of cash in a portfolio varies fund to fund). Net investment by the domestic mutual funds in the last one week actually stood at Rs 33.5 bn! Besides, based on our interaction with select mutual funds, there have not been any significant redemption pressures in the last week, which is heartening.

    Net investments - Contratrians in actionů
    (Rs bn) FIIs MFs Total
    19-May-06 (13.6) 8.5 (5.1)
    22-May-06 (9.3) 4.0 (5.3)
    23-May-06 (12.4) 5.3 (7.1)
    24-May-06 (19.4) 11.6 (7.8)
    25-May-06 (16.3) 4.1 (12.2)
    Total (71.0) 33.5 (37.5)

    The last week also witnessed corporates announcing their full year results. Unlike the last eight quarters, corporate performance has been mixed in the last quarter. While the likes of HPCL surprised the markets (operating profit grew by more than 3.2 times in 4QFY06), the performance of SAIL and OBC were lackluster. The combined topline growth for the Quantum Universe companies (around 300) in 4QFY06 was 24% YoY, while the net profit grew by 35% YoY. In our view, we expect earnings growth to slowdown in light of higher input costs, increased capital expenditure and higher base effect.

    Top gainers during the week (NSE-50)
    Company Price on
    May 26 (Rs)
    Price on
    May 19 (Rs)
    %
    Change
    52-Week
    H/L (Rs)
    BSE-SENSEX 10,809.35 10,938.61 -1.2% 12,671 / 6,439
    S&P CNX NIFTY 3,209.60 3,246.90 -1.1% 3,774 / 1,976
    Tata Steel 538.25 503.5 6.9% 679 / 329
    A.C.C 799 754 6.0% 1,061 / 370
    CIPLA 234 222 5.6% 305 / 113
    GUJ AMBUJA 99 95 3.8% 128 / 49
    REL ENERGY 531 514 3.4% 706 / 459

    Having looked the institutional activity and select corporate result announcements in the last one-week, let us consider some sector/stock specific developments:

    • Domestic pharma heavyweight, Ranbaxy, entered into an in-licensing agreement with Ethypharm LL India, wholly-owned subsidiary of Ethypharm, the leading French drug delivery company. The agreement is for the domestic market and would involve marketing of Ethypharm's painkiller drug, Tramadol 50 mg. The product will be supplied from the French major's manufacturing facility near Mumbai, and will be marketed and distributed by Ranbaxy under its brand name 'Trambax'. The marketing rights for the drug in the domestic territory will thus provide Ranbaxy a way to grow is India revenues faster. India currently contributes to around 22% of the company's total revenues. Ranbaxy was down 1.4% over the last one week. Other Pharma Stocks

    • NTPC, the country's largest power producer, is planning to set up a series of merchant power plants for direct sale of electricity to bulk consumers. Currently, its entire power generation is sold to states at a break-even cost under long-term power purchase agreements with state electricity boards (SEBs). The proposed plants will give the company an opportunity to sell electricity on better commercial terms to bulk buyers, either under long-term bilateral deals or under forward trading or in the spot market. It has identified four hydel power projects (totaling 1,551 mw) to be set up as merchant power plants in Uttaranchal. Compared with a traditional rate-based power plant, a merchant power plant sells electricity in the wholesale power market without requiring to serve any specific consumer. Moreover, returns from a merchant power project are much higher. At present, NTPC sells power at an average cost of Rs 1.6 a unit, while the cost of Selectricity to be sold from the proposed merchant power plants would fetch around Rs 6 a unit. This will help the company to increase its topline going forward. The stock was marginally down over the last one week.

      Top losers during the week (NSE-50)
      Company Price on
      May 26 (Rs)
      Price on
      May 19 (Rs)
      %
      Change
      52-Week
      H/L (Rs)
      ONGC 1,177 1,290 -8.8% 1,514 / 854
      TATA POWER 497 534 -6.9% 613 / 364
      DR.REDDY 1,416 1,517 -6.6% 1,754 / 693
      HDFC 1,171 1,252 -6.4% 1,420 / 747
      L&T 2,363 2,499 -5.5% 2,915 / 1,034


    • TVS Motors is in talks with a Brazilian automobile manufacturer to set up an assembly joint venture for two wheelers. The plant will be set up in Brazil and will cater to the Mercosur region, which is a 1 m two- wheeler market. The company plans to introduce the complete range of two wheelers starting from step-thrus to regular models. It had recently announced its plans to set up another assembly plant in Columbia. These regions cover the entire South American market sized at 1.4 m and growing at the rate of 10% pa. This will help TVS Motors to venture into new geographies and diversify its revenue stream. The stock was down around 2% in the last week. Other Automobile Stocks.

    • Dabur is planning to focus on the fruit drinks market after having captured 58% of the fruit juice market with its brand 'Real'. The fruit drinks market is pegged at Rs 12.5 bn and the company is aiming to re-launch its brand 'Coolers' to capture a significant portion of this market. Currently, Dabur enjoys less than 1% market share in this segment. This move is a positive for Dabur as the fruit drinks market is growing at a rate of over 50% per annum. Dabur is aiming to corner around 5% to 8% of this market in the next three years. Other FMCG Stocks

    As is known and discussed threadbare, it is difficult to take a call on what FIIs will be doing going forward. We again re-iterate that one should not base his/her investment decision on FIIs. Many stocks have fallen significantly over the last one-month and we believe that it is time to start allocating money towards equities. As far as sectors are concerned, we have a cautious view on commodities (steel in particular) and current valuations of FMCG and engineering companies. The fact remains that equities are a risky asset class and tend to be volatile. But if is careful in stock selection, the day-to-day movement should not be a big cause of concern. Happy investing!

     

     

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