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Confidence restored? - Views on News from Equitymaster
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  • Jun 5, 2004

    Confidence restored?

    It was a mixed week, filled with apprehension and expectations, as market participants stayed alert to the developments taking place between our newly appointed Finance Minister and various market and industry representatives. Amidst all this, the Indian investor was forced to guard himself against the strong bouts of volatility witnessed on the bourses at the end of which, the indices finally managed to close with gains of about 1% each.

    The week started on a significantly bearish note, as the hangover of last Friday's 4% fall took its toll in Monday's trade. In early trades on Monday, the BSE-Sensex paid a brief visit to the below 4,700 levels zone. However, bargain hunting at lower levels saw the markets gaining strength, recouping some of the losses garnered during early trade. This buying activity continued well into Tuesday and Wednesday's trade as the indices gained over 3% over these two sessions. Thursday also saw the markets open on an optimistic note as the Sensex charted into the 5,000+ territory, only to succumb to a sharp bout of profit booking at these levels. Friday again saw some early weakness, however, buying at lower levels pushed the indices into the positive.

    It must be noted that while the markets held ground, our Finance Minister (FM) continued with his exercise of trying to convince the investor community Foreign Institutional Investors (FIIs), MF managers, brokers and industry leaders) of the continuation of reforms in the country. The FM re-iterated his stand on the achievement of the 7%-8% GDP growth going forward in the backdrop of maintaining 'fiscal prudence and financial discipline'. While the early indications from the meeting did not enthuse investors, which was reflected in the market fall on Thursday as soon as the FMs exercise came to an end, it was only when the government's stand on certain issues was made relatively clear that the indices bounced back during Friday's trade. The FMs constant re-affirmation of India's economic growth seemed to have finally succeeded at allaying investor and industry fears and restored market confidence, at least for the time being. The FII inflows behaviour (see chart above) also seems to indicate that their pessimistic outlook towards the India story seems to have subsided. However, we continue to maintain that a clear and definitive direction of the markets would be arrived at only after the Budget in July.

    Key gainers over the week (NSE-50)
    COMPANY Price on
    May 28 (Rs)
    Price on
    June 4 (Rs)
    H/L (Rs)
    BSE-SENSEX 4,835 4,889 1.1% 6,250 / 3,187
    S&P CNX NIFTY 1,509 1,521 0.8% 2,015 / 1,010
    GAIL 153 171 11.6% 312 / 99
    ICICI BANK 246 268 9.1% 352 / 133
    SUN PHARMA 375 400 6.7% 420 / 153
    PNB 261 278 6.4% 397 / 135
    HERO HONDA 450 479 6.3% 544 / 226

    In the meanwhile, here a few statements, that emit positive signals, post the FMs meeting with the market participants and industry representatives:

    • No increase in interest rates until international interest rates move closer to India's levels

    • Review of capital gains tax regime for FIIs

    • Pension funds may be allowed to invest in open-ended equity funds

    • Banks can raise capital from the markets subject to maintaining the government's holding at 51%

    • Banks may be allowed to increase their exposure to capital markets

    • Continued stress on agriculture reforms in the form of simplification of procedures to smoothen the flow of credit to the sector

    • Achieving 7%-8% economic growth in the backdrop of maintaining 'fiscal prudence and financial discipline'

    • The minister stayed committed to the continuation of power reforms, albeit markets expect more clarity

    • Last but not the least, tax reforms likely as per the Kelkar Committee Report, albeit with some modifications to reflect the Common Minimum Program (CMP)

    Key losers over the week (NSE-50)
    COMPANY Price on
    May 28 (Rs)
    Price on
    June 4 (Rs)
    H/L (Rs)
    TATA POWER 275 240 -12.9% 450 / 130
    BHARTI TELE 148 133 -10.3% 189 / 36
    DR.REDDY 888 801 -9.8% 1,471 / 675
    MARUTI 405 384 -5.3% 156 / 602
    CIPLA 240 230 -4.2% 284 / 136

    To conclude, while everyone eagerly awaits the Budget (for any potential built-in surprises), we believe that after the sharp correction witnessed over the last one month, valuations have started looking attractive from a long-term perspective. Thus, rather than waiting for the markets to fall further, one must start building a diversified portfolio of companies that have competent management and a track record of consistently high growth. After all, this century is widely touted to be the Indian century.



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