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It is not a casino!

Jun 17, 2006

After the last week's decline, the Indian stock market witnessed another round of selling pressure accompanied by volatility. During the week, equity markets across the world also showed volatility with inflation and interest rates remaining the focus areas. For the first time in calendar 2006, the BSE-Sensex fell below the so-called support level of 9,000 levels during the week (albeit with no support!). The index actually fell below the 9,000 mark only to bounce back sharply towards the end of the week. Though markets gained momentum during the week, stocks from many sectors were battered. Cement stocks witnessed a bout of selling pressure, despite media reports of cement prices having gone up in Mumbai and select part of southern India. In our view, monsoon is a yearly phenomenon and therefore, one should not focus on whether cement prices are bad in July and good in December in any given year. What is important to focus on is the demand-supply equation and how favorable it is for the manufacturers. In the last decade, despite monsoons and droughts, cement demand has grown at a CAGR of 8% per annum. While we expect cement prices to remain firm in the short-term, even after the decline in stock prices, cement stocks (at a broader level) are expensive.

As far as the institutional activity on the bourses is concerned, Foreign Institutional Investors (FIIs) were net sellers this week (to the tune of Rs 2.0 bn). Like in the last two weeks, domestic mutual funds (MFs) were net sellers. Many fund managers opine that there has not been any significant redemption pressure and the cash positions are estimated at around 8% to 10%. Given this backdrop, it is perplexing to note that domestic mutual funds are selling continuously at current levels even as they were buying mid May 2006 (if cash positions are high, redemptions can be managed from the same). The only answer could be that the fund managers are re-aligning their portfolio, which is a costly proposition. While we do not wish to generalize that all mutual funds have been caught on the wrong foot, from an investor's standpoint, the last one-month has clearly differentiated the wheat from the chaff. The next time your mutual fund advisors recommends a fund for investment, understand how the fund was managed in the last three months (March 2006 to May 2006). It will help you decide whether to invest or not! The table below highlights the net FIIs and MFs status.

Net investments
(Rs m) FIIs MFs Total
7-Jun-06 319 -2,175 (1,856)
9-Jun-06 1,113 -2,332 (1,219)
12-Jun-06 979 -102 877
13-Jun-06 -819 -2,925 (3,744)
14-Jun-06 -3634 -3,383 (7,017)
Total (2,042) (10,917) (12,959)

BSE Sensex gained during the last week by 0.8%. Moreover, this time, most of the sectors gained as compared to the previous week with the exception being BSE Bankex. The table below highlights the change in sectoral indices over the last week.

Key indices over the week
Index Price on
June 9(Rs)
Price on
June 16(Rs)
%
Change
BSE Small-cap 5054.29 4891.01 -3.3%
BSE Mid-cap 4190.25 4087.97 -2.4%
BSE METAL 7492.77 7500.72 0.1%
BSE HEALTHCARE 3031.74 3051.19 0.6%
BSE PSU 4704.92 4744.02 0.8%
BSE IT 3406.91 3437.9 0.9%
BSE AUTO 4473.87 4477.49 0.1%
BSE OIL&GAS 4680.79 4731.96 1.1%
BSE BANKEX 4422.96 4386.67 -0.8%
BSE FMCG 1755.45 1792.82 2.1%

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

  • Telecom major, Reliance Communication Ventures (RCVL), approached the government seeking spectrum to start GSM services in the country. This development is significant, as the company has been offering CDMA-based mobile services in the country (currently, it is around 20 m). The licence, if granted, would give RCVL the flexibility of offering both technologies or migrating to GSM over a period of time. The company will then be the second-largest telecom player in the world, having a presence in both GSM and CDMA-based services. The stock closed 3% higher week-on-week. Other telecom stocks.

  • As per media reports, Dabur, India's fourth largest FMCG company, has chalked out major expansion plans for overseas markets and is also considering acquisitions and alliances outside India. The company aims to earn 15% of its sales revenue from the overseas markets in the next 4 years. Its international business grew by 19% YoY in FY06. In line with its strategy, the company had revamped its international business organisational structure last fiscal. The stock closed with 3.8% up during the week. Other FMCG stocks.

    Top gainers during the week (BSE-A)
    Company Price on
    June 9(Rs)
    Price on
    June 16(Rs)
    %
    Change
    52-Week
    H/L (Rs)
    BSE-SENSEX 9,810.46 9,884.51 0.8% 12,671 / 6,856
    S&P CNX NIFTY 2,866.30 2,890.35 0.8% 3,774 / 2,104
    JINDAL STAINLESS 66.25 89 34.3% 165 / 63
    BHARAT FORGE 265.65 340.00 28.0% 485/221
    WELSPUN GUJ 54.9 68.9 25.5% 113/53
    BOM DYEING 428.45 529.15 23.5% 989/260
    IND HOTEL 885.05 1,079.90 22.0% 1584/610

  • The auto components manufacturing division of Ashok Leyland is exploring possibilities of entering the Malaysian market. The company is already supplying components to Tractor Malaysia, a leading local major and had recently scaled up its operations in Malaysia by supplying its components to several ancillary companies there as well. The auto components group, set up last year, is totally export-oriented and exports to markets in the West Asia, South East Asia, the US and Europe. The revenue of the division is expected to touch US$100 m by FY09 (from US$ 20 m in FY07E). This steep scaling of turnover would be achieved by manufacturing new components for the automotive and industrial sectors and tapping fresh export markets. The stock closed with 4.2% down during the week. Other Auto stocks.

    Top losers during the week (BSE-A)
    Company Price on
    June 9(Rs)
    Price on
    June 16(Rs)
    %
    Change
    52-Week
    H/L (Rs)
    NEYVELLI LIGNITE 66.2 55.65 -15.9% 100 / 47
    INDUSIND BANK 36.5 30.75 -15.8% 84/27
    GEOMETRIC SOFT 88.15 75.15 -14.7% 135/73
    ADANI EXPORT 142.65 122 -14.5% 199/48
    MASTEK 367.35 316.75 -13.8% 438/173

  • Post the rebound in the last two days of the week, many investors are unsure whether this is sustainable or not. In our view, instead of predicting when the markets will bottom-out (which nobody can get it right), we rather suggest investors to focus on valuations. If valuations support the future growth potential of the company, invest. Otherwise, keep away from the stock. More importantly, please understand and appreciate the following facts:
  1. Equities are a risky asset class

  2. Equities can provide superior return as compared to other asset class over the long-term and

  3. Stock market is not a casino.

Happy investing!


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