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The rally continues! - Views on News from Equitymaster
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  • Jun 4, 2005

    The rally continues!

    It was a rather volatile week for the Indian markets, but not without reason. Nonetheless, one should expect this at the current high levels. However, at the end of the extended week, the benchmark indices closed with about 1% gains, thus making it the fifth consecutive week of gains. Both the BSE-Sensex and the NSE-Nifty are sitting on significant uninterrupted gains of 9.4% and 9.7% respectively, which they have managed to garner right from the start of May 2005.

    The markets started trade on a cautious note on Monday as investors opted to adopt a seemingly cautious approach post the over 3% gains of the previous week. This apprehensiveness at buying at higher levels soon led to intensified selling pressure as investors took profits off the table, pushing the markets deep into the red and breaking the winning streak of the past 7 trading sessions. However, the bulls which were forced to retreat, came back with a vengeance in Tuesday's trade as the markets, despite opening on a jittery footing, proceeded to move higher and end the day with near 1% gains. This followed a day's consolidation during Wednesday's trade, before a seemingly adverse news regarding the possibility of deficient rains in the month of June affected sentiments on Thursday, bringing the markets down sharply. However, things returned back to normalcy the very next day as the Indian Met Department re-affirmed its stance of normal monsoons this season. Saturday's extended trading saw the markets close flat.

    While the markets once again managed a positive close this week, this time the drivers seem to have changed. As can be seen in the chart above, for the first 4 trading sessions of the week, Foreign Institutional Investors (FIIs) pumped in over Rs 8 bn after being net sellers for the past several weeks. On the other hand, mutual funds (MFs), which have been the market pillars in FY06 as yet, turned net sellers with Rs 3 bn sales. However, since one week of FII inflows cannot be assumed to be a trend, the million-dollar question remains - will the FII flows resurrect?

    Key gainers over the week (NSE-50)
    COMPANY Price on May 27 (Rs) Price on June 4 (Rs) % CHANGE 52-WEEK H/L (Rs)
    BSE-SENSEX 6,708 6,753 0.7% 6,955 / 4,228
    S&P CNX NIFTY 2,076 2,092 0.8% 2,183 / 1,292
    REL. ENERGY 497 546 9.9% 690 / 436
    COLGATE 220 240 9.3% 242 / 102
    HLL 138 151 9.0% 170 / 101
    ZEE TELE 138 148 6.9% 189 / 120
    RELIANCE 531 555 4.5% 601 / 400

    Coming to some sector/stock specific developments during the week:

    • Apparently, reports that the warring Ambani brothers are soon likely to reach a settlement over the contentious ownership issue plaguing the Group companies fuelled investor interest towards the Reliance Group stocks in the latter half of the week, putting them in the top gainers list. However, investors should note that such reports have floated in the past also and one should tread cautiously as there is no official confirmation of the news.

    • Colgate was another big gainer amongst the index stocks this week. It must be noted that the company's 4QFY05 results were not enthusing enough to have led to the sharp gains. However, it is planning to tap the growing personal care and home care market in India. Further, in a bid to reduce costs and increase margins, the company is aiming at rationalisation of manufacturing facilities. Accordingly, a 5-year plan has been chalked out wherein it will reduce its various products manufacturing locations globally and new manufacturing facilities would be set up in India and China respectively. Further, it must be noted that the company has increased prices of its economy brand, Cibaca toothpaste, by Rs 2.

    • FMCG major, HLL, was another key gainer on the bourses this week. The optimism towards the stock was seemingly a factor of the company having increased prices of its toothpastes and shampoo brands by 5%-10%, in response to higher input costs and implementation of VAT. The company had earlier increased the prices of its detergents by 5% after crude oil prices per barrel went past the US$ 50 mark. Other FMCG stocks during the week

    • Zee group, through its cable distribution arm, Siticable, has zeroed in on acquiring a large number of cable networks across the country. The group will acquire a Delhi based cable network SpectraNet. It must be noted that recently, Siticable had bought out the RPG Netcom cable network in Kolkata for Rs 180 m. The next target for the company is Hathway Cable, which happens to be one of the largest cable network and multi system operators (MSO). It must be noted that nearly 50% of Zee's revenues are derived from subscriptions and this move by the company augurs well, as it will have a larger number of declared subscriber base. The stock was amongst the top gainers this week, up 7%. Other media stocks during the week

      Key losers over the week (NSE-50)
      COMPANY Price on May 27 (Rs) Price on June 4 (Rs) % CHANGE 52-WEEK H/L (Rs)
      HINDALCO 1,176 1,109 -5.7% 1,500 / 901
      GAIL 224 213 -4.8% 270 / 159
      SAIL 54 52 -4.8% 70 / 22
      HERO HONDA 580 558 -3.8% 616 / 411
      TATA POWER 386 375 -3.0% 425 / 213

    • Steel majors SAIL, Essar Steel, indal Vijaynagar and Ispat Industries triggered the well-anticipated downturn in the steel cycle by announcing a reduction of Rs 2,000 per tonne of the metal. This is in line with the recent global trend wherein international steel prices have collapsed in the region of Rs 4,000 to Rs 5,000 per tonne in 2005. To add to this, aluminium majors Nalco and Hindalco also cut prices by Rs 2,500 per tonne. This correction is following the subdued trends on the London Metal Exchange (LME). The bearish sentiment on commodity prices have also been in view of the fact that China has stalled all purchases of metals in anticipation of appreciation of Chinese currency. Thus, the high margins that the steel companies have enjoyed in FY05 are likely to come under pressure in the current fiscal. This was reflected in the correction witnessed in the stock price of these companies, as can be seen in the table above. Other steel stocks during the week

    Going forward, with markets once again seemingly determined to test their previous all-time highs, increased volatility is imminent. Further, next week would see heightened investor expectations, as they await the arrival of the monsoon. However, the long-term prospects for our economy and Indian equities remains unquestionably bright, it is the short-term developments that impact market movements. While we believe that monsoons could play the deciding factor if the current strength in the markets will sustain or not, investors must continue to invest in fundamentally strong companies, albeit in a staggered manner, so as to take the utmost advantage of market irrationalities. Happy investing!



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