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The economic euphoria! - Views on News from Equitymaster
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  • Jun 2, 2007

    The economic euphoria!

    Aided by the record-breaking FY07 GDP numbers, bulls stamped their authority on the bourses in the week gone by. For the week ended June 1, 2007, while the BSE-Sensex edged higher by 1.6%, gains in NSE-Nifty were a tad lower at 1.2%.

    Though the markets ended in the positive for four days out of five, they were largely groping for direction, more so during the initial part of the week. Volatility ruled the roost for the first three days as indices oscillated between negative and positive territories. Lack of a significant trigger seemed to be the reason, but not for long. Markets got a positive surprise on Thursday when the CSO announced that Indian GDP for FY07 has stood at a stronger than expected 9.4% and this injected fresh life into the markets. Not only did they end strongly on that day, the optimism also spilled over to Friday, resulting into a strong opening. Profit booking at higher levels however, forced the indices to shed most of its gains, but they still managed to end above break even for the day and rather strongly for the week.

    On the institutional activity front, FIIs emerged net buyers to the tune of Rs 9.5 bn while MFs bought/sold equities worth Rs 1.3 bn.

    (Rs m) MFs FIIs Total
    24-May (4,102) 3,195 (907)
    25-May 383 (1,471) (1,088)
    28-May 1,533 3,242 4,775
    29-May (42) 8,374 8,332
    30-May 3,546 (3,771) (225)
    Total 1,318 9,569 10,887

    As far as the sectoral indices are concerned, barring the IT and FMCG index, all the other indices were able to avoid a coat of red. The auto index, after a long time, emerged as the top gainer with gains of 3.5%. However, no particular stock drove the index, as it was a result of gains posted by all the major companies like Hero Honda, Tata Motors, Bajaj Auto and M&M. Among the losers, due to weakness in pivotals like ITC and HLL, the FMCG index ended at the bottom of the list.

    Index As on May 25 As on June 1 % Change
    BSE AUTO 4,860 5,030 3.5%
    BSE BANKEX 7,467 7,683 2.9%
    BSE SMLCAP 7,266 7,474 2.9%
    BSE HEALTHCARE 3,746 3,852 2.8%
    BSE MIDCAP 6,143 6,264 2.0%
    BSE OIL AND GAS 7,685 7,780 1.2%
    BSE PSU 6,734 6,773 0.6%
    BSE METAL 10,473 10,468 0.0%
    BSE IT 4,959 4,908 -1.0%
    BSE FMCG 1,912 1,891 -1.1%

    Let us have a look at some of the important stock/sector specific developments during the week:

    Food and cigarettes major, ITC, announced its FY07 results this week. The company reported a decent topline performance for FY07 with a growth of 26% YoY, driven by the non-cigarette FMCG businesses, agri-business and the hotels business. While cigarette continued to contribute 60% to the revenues in FY07, its share has come down from 64% in FY06. The non-cigarette portfolio grew by 33.1% YoY during the year. The cigarette division grew by 13% YoY, while branded foods reported a 68% YoY growth. Hotel segment continued with its strong performance led by higher tourist inflow, better room rates and improved occupancies. The segment grew by 26% YoY in FY07, while the paper segment witnessed a 11% YoY growth. The operating margins have however declined by 200 basis points due to higher raw material costs. Excluding the exceptional item (one off assistance to contract manufactures) to the tune of Rs 450 m, the net profits have grown by 18.4% YoY. The stock however, closed 3% lower for the week along with peer HLL that edged lower by 1%.

    Top gainers during the week (BSE A)
    COMPANY Price on May 25 (Rs) Price on June 1 (Rs) % CHANGE 52-WEEK H/L (Rs)
    BSE SENSEX 14,338 14,571 1.6% 14,724 / 8,799
    S&P CNX NIFTY 4,248 4,297 1.2% 4,326 / 2,596
    NIRMA 161 192 18.9% 248 / 145
    L&T 1,702 2,001 17.6% 2,058 / 903
    G E SHIPPING 263 295 12.3% 307 / 113
    THERMAX LTD. 440.1 497.7513.10% 509 / 206
    WELSPUN GUJ. 161.15 181.35 12.50% 184 / 47

    Deccan Aviation closed 6% higher for the week while its peer Jet Airways closed 8% higher. In one of the landmark deals in the Indian aviation history, two of the leading players from the sector, Deccan Aviation and Kingfisher Airlines have agreed to come together to form the second largest combination in the industry with a market share of 29.2%, just a notch below Jet-Sahara combine's share of 29.4%. As per the agreement, the UB Group (Kingfisher's holding company) will buy a 26% stake in Deccan at a price of Rs 155 per share. Kingfisher will then make an open offer to hike its stake by a further 20%. Capt. Gopinath, the promoter of Deccan, will keep his top seat at the company. The merger brings to light the need for industry players to consolidate and command some kind of pricing power when cut-throat competition has led to airfares crashing across categories - low cost carriers as also full-service operators.

    Top losers during the week (BSE A)
    COMPANY Price on May 25 (Rs) Price on June 1 (Rs) % CHANGE 52-WEEK H/L (Rs)
    SKF INDIA 498 452 -9.2% 513 / 209
    INDUSIND BANK 49 46 -7.2% 63 / 27
    SUZLON ENERGY 1,378 1,285 -6.8% 1,510 / 769
    ASAHI INDIA 112 105 -6.5% 152 / 70
    SAIL 148 139 -6.3% 150 / 61

    Engineering major, BHEL, closed 5% higher for the week. This is on the back of strong results announced by the company for FY07. Sales grew by 30% YoY in FY07, while net profits were up 44% YoY. Operating margins expanded by 1.4%, led by lower raw material and other costs (as percentage of sales). Both the power and industry divisions recorded strong performances for the full year. The order backlog stood at Rs 550 bn (3.2 times FY07 sales) at the end of March 2007. The Board has recommended a final dividend of Rs 6 per share (dividend yield of 0.2%) and bonus issue in the ratio of 1:1 (one additional share for every one equity share held by members on the record date i.e., June 1, 2007). Its peers L&T (up 15%) and ABB (up 5%) also closed firm for the week.

    Last week we had mentioned how the risk reward ratio in large caps seems skewed mostly towards risks and how there may be still some steam left in mid caps and small caps if selected properly. These indices are already up 2% and 3% for the week. Hence, while these indices will continue to look attractive and hold great potential, it is also here that investors tend to burn their fingers the most by resorting to some horrendous stock picks. Therefore, it is here more than anywhere else that one needs to conduct an extremely honest assessment of the investment opportunity and not fall into traps of lofty promises.



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