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Let's plan for the future! - Views on News from Equitymaster
 
 
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  • Jun 10, 2006

    Let's plan for the future!

    What started as a 'healthy correction', as termed by market participants (it is another matter that they did not expect it!), gained momentum during the course of the last week leading to many calling it as a start of a 'bear market' towards the end! Except for a sharp bounce back on Friday, it was a week to forget for investors in general.

    There were two policy measures that set the stage for the future in the last week. One was the 'surprise' increase in interest rates by the Reserve Bank of India. The hike in interest rate, post the market close on Thursday, coincided with the increase in interest rates by central banks across various economies, developing and developed alike. This included the Central Bank of the Republic of Turkey, Bank of Thailand, ECB and Bank of Korea. Even as interest rates were increased, on Friday, most of the Asian stock markets gained sharply (including India).

  • Click here to read more on the interest rate hike

    Secondly, the ruling UPA finally decided to bite the bullet after 'fighting' among the coalition with respect to the hike in prices of petrol and diesel. Though kerosene and LPG (liquefied petroleum gas) were spared from any hike (on the grounds of safeguarding the 'aam aadmi'), the fact that the government did not retreat to the pressure from the 'Left' front post the price hike was commendable. Apart from the price hikes, lowering of customs duty (on petrol and diesel) and issuance of oil bonds to the tune of Rs 280 bn was also decided. As far as the implication on the oil PSUs is concerned, we still remain concerned about the profitability of these companies. While the price hike and oil bonds will bring back some cheer to the PSUs, there woes have not been fully addressed.

  • Click here to read more on the implications of the price hike on oil companies

    As far as the institutional activity on the bourses is concerned, as we had mentioned earlier, Foreign Institutional Investors (FIIs) were net buyers this week (to the tune of Rs 10.4 bn). Unlike the last two weeks, domestic mutual funds (MFs) turned net sellers last week, probably led by redemption pressures. As per the RBI, almost 77% of net annual foreign capital inflows into the country were of volatile nature. But the volatile component of foreign capital inflows had eased to 40.9% in FY05 from 76.3% in FY04. FII inflows are less than 40% of total forex reserves.

    Net investments - You buy, I sell!
    (Rs m) FIIs MFs Total
    2-Jun-06 6,405 (1,094) 5,311
    5-Jun-06 5,710 (4,173) 1,537
    6-Jun-06 848 (2,577) (1,729)
    7-Jun-06 319 (2,175) (1,856)
    8-Jun-06 1,113 (2,332) (1,219)
    Total 14,395 (12,351) 5,119

    As far as sectoral index movement was concerned, undoubtedly, mid-caps have witnessed significant erosion in market capitalization in the last one week, closely followed by the BSE Metal index. The sharp decline in metal stocks is not a surprise, considering the fact that commodities traded very volatile in the global markets. As per the Asian Development Bank, while gold prices fell by 2.6% week-on-week, crude and sugar prices fell by 0.9% and 2.2% respectively. Despite the price hike in petrol and diesel prices last week, the BSE Auto index declined relatively lower than the benchmark.

    Key indices over the week
    Index Price on
    June 1(Rs)
    Price on
    June 9(Rs)
    %
    Change
    BSE Small-cap 6,142 5,054 -17.7%
    BSE Mid-cap 4,911 4,190 -14.7%
    BSE METAL 8,183 7,493 -8.4%
    BSE HEALTHCARE 3,297 3,032 -8.1%
    BSE PSU 5,087 4,705 -7.5%
    BSE IT 3,535 3,407 -3.6%
    BSE AUTO 4,581 4,474 -2.3%
    BSE OIL&GAS 4,910 4,681 -4.7%
    BSE BANKEX 4,730 4,423 -6.5%
    BSE FMCG 1,825 1,755 -3.8%

    The last week also witnessed some leading corporates announcing their full year results. Indian Hotels, Sun Pharma and Titan posted commendable results for the full year ended March 2006. In a falling market, gainers were few and included the likes of IPCL, HDFC, Mastek and Gail. Mr. Deepak Parekh, post the interest rate hike by the Reserve Bank of India (RBI) on Thursday, mentioned that HDFC may not raise interest rates on home loans, considering the fact that the hike has immediate effect largely on short-term loans whereas HDFC's borrowings are medium to long-term in nature. However, ICICI Bank increased interest rates on home loans signaling that other banks will follow suit going forward.

    Top gainers during the week (BSE-A)
    Company Price on
    June 2 (Rs)
    Price on
    June 9 (Rs)
    %
    Change
    52-Week
    H/L (Rs)
    BSE-SENSEX 10,451 9,810 -6.1% 12,671 / 6,757
    S&P CNX NIFTY 3,091 2,866 -7.3% 3,774 / 2,082
    IPCL 234 248 6.2% 299 / 159
    HDFC 1,177 1,208 2.7% 1,420 / 808
    Mastek 361 367 1.9% 438 / 173
    Abbott 503 511 1.7% 785 / 481
    GAIL 238 240 0.9% 325 / 208

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

    • Reliance Communications Ventures (RCVL) is making its first foray in the Gulf region, with an offering of an interactive television, broadband and media solution. This will be the first time that the company will be offering more than broadband services. The solution, called RiTV, delivers on-demand entertainment, Internet access and information services to its users. The company is also eyeing a market of the large five-star as well as four-star hotels in the Gulf region, which is being promoted as a tourist destination. This is a positive for RCVL, as it will enable it to increase the markets that it serves. The stock closed 14.9% down during the week.

    • Glenmark Pharma inked a deal with Paul Capital Partners' Royalty Fund, where the healthcare fund would invest US$ 27 m to finance the development of 16 dermatological products by Glenmark for the US market. Following US FDA approval and the launch of each product, Glenmark will pay a royalty on net sales to Paul Royalty. Glenmark will be responsible for pre-clinical development and manufacture of the products, filing of the ANDAs as well as marketing of the products. The basket of products has combined revenues worth US$ 1 bn. The ANDA filings are expected to begin by the end of 2006 and will be filed over a period of two years. This is a positive for Glenmark and will enable it to establish a presence in the US generics market. The stock closed 11% down during the week.

      Top losers during the week (BSE-A)
      Company Price on
      June 2 (Rs)
      Price on
      June 9 (Rs)
      %
      Change
      52-Week
      H/L (Rs)
      CHENNAI PETRO 212 156 -26.5% 281 / 143
      HMT LTD 58 43 -26.4% 111 / 38
      Jindal Steel 1,779 1,311 -26.3% 2,180 / 840
      Bombay Dyeing 676 508 -24.8% 989 / 260
      D-Link India 90 68 -24.8% 185 / 64

    • Wockhardt signed an agreement with LSI, a UK-based company specializing in dermatology, to market Vitix. Vitix will be launched in India in 3QCY06. The product will be marketed in Europe, North America, South East Asia and Africa. The introduction of Vitix strengthens Wockhardt's dermatology portfolio. The company's dermatology basket includes the Nadoxin range. The stock was down 8.4% during the week.

    • Gujarat Ambuja Cement (GACL) and Grasim Industries are in the process of setting up fly ash-based cement plants in Uttar Pradesh. Both the plants are to be set up in Dadri near Greater Noida with an annual production capacity of 120,000 tonnes each. GACL would initially invest Rs 1.3 bn, where the cost of the plant and machinery is estimated to be Rs 760 m. Its cement unit would source the flyash from the nearby Dadri super thermal power plant of NTPC. The company also has plans to set up 12 MW captive power plant for meeting the electricity requirements of the plant. On the other hand, Grasim will invest Rs 1.2 bn for its 120,000 tonne plant at Dadri. This expansion will help the companies increase their production to meet the growing demand. GACL was down 1.7% last week.

    Even as experts continue to predict that the Indian stock markets will decline by another 1,000 to 2,000 (wonder where they were before fifteen days!), we re-iterate that it is difficult to time the market. At current valuations levels, many stocks have become attractive from a long-term standpoint, both in the large-cap and midcap space. Invest for the long-term, tide over the volatility and equities can deliver returns in excess of 15% CAGR over the next two to three years. Let the 'experts' debate. Let us plan for our future!

     

     

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