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Above 10,000: Big deal!

Jun 24, 2006

As compared to the last fortnight, this time the markets were range bound. Amidst apprehensions, the market ended the week on a positive note accompanied by relatively lesser volatility. Though the markets opened the week on a negative note with participants resorting to profit booking after the last week's gains, the direction was clear. Even as some global 'experts' predicted further pains for emerging markets and India, investors shrugged off these concerns and invested in stocks. During the week, Friday saw the markets opening sharply in the red only to recover towards the end of the day. This week also saw the 10-year G-sec yield crossing a four-year high of 8% levels. This was led by two factors. Firstly, the fluid global interest rate scenario and secondly, the wholesale price index (WPI) rose significantly in the last week to 5.24%. With inflation rising much faster than anticipated, investors are expecting a possibility of further interest rate hikes in the forthcoming quarterly review on the Monetary Policy.

Against the common view that the hike in petrol prices led to higher inflation, as per CMIE, the weight of petrol and diesel in the WPI is only 0.9% and 2.0% respectively. This means the price hikes does not have a major impact on the WPI. But what has actually contributed to higher inflation is the fact that food prices (including food grains) have risen substantially. Also, it is pertinent for investors to understand the fact that the RBI's inflation target is 5% to 5.5% and WPI in the last week is well within the targeted limit. Only if inflation goes up substantially above this level or inflationary expectations are higher will be the RBI resort to a 'substantial' rate hike. Having said that, we have mentioned in the past that interest rates will be increased over the course of the year.

As far as the institutional activity on the bourses is concerned, Foreign Institutional Investors (FIIs) were net buyers this week (to the tune of Rs 7.1 bn). Like in the last two weeks, domestic mutual funds were net sellers. The following table shows the overall FIIs and mutual funds (MFs) activity during the week.

Net investments
(Rs m) FIIs MFs Total
15-Jun-06 1,399 118 1,517
16-Jun-06 6,596 (796) 5,800
19-Jun-06 220 (526) (306)
20-Jun-06 (1996) (619) (2,615)
21-Jun-06 915 980 1,895
Total 7,134 (843) 6,291

BSE-Sensex gained during the last week by 5.2%. This time around, the BSE Metal index posted significant gains, led by steel stocks in particular. During the week, the Mittal Steel's bid to take over Arcelor gained momentum with Arcelor 'wanting' a higher bid from Mittal Steel. Though news reports are yet to be confirmed, if the merger/takeover fructifies, consolidation is likely to be a positive for the sector in the long-term. But we remained concerned with respect to steel prices in the medium-term. Another interesting aspect during the week was that the BSE Midcap and the BSE Smallcap indices outperformed the benchmark by more than two times. This is against the 'popular' consensus that investors should have a larger exposure to large-caps, especially after the 'shock' in the last two months. In our view, investors should choose good companies and it does not matter if it is a large cap or a midcap. The table below highlights the change in sectoral indices over the last week.

Key indices over the week
Index Price on June 16(Rs) Price on June 23(Rs) % Change
BSE Small-cap 4891.01 5533.51 13.1%
BSE Mid-cap 4087.97 4421.13 8.1%
BSE METAL 7500.72 8292.84 10.6%
BSE HEALTHCARE 3051.19 3179.74 4.2%
BSE PSU 4744.02 5002.32 5.4%
BSE IT 3437.9 3626.54 5.5%
BSE AUTO 4477.49 4653.12 3.9%
BSE OIL&GAS 4731.96 5128.91 8.4%
BSE BANKEX 4386.67 4447.53 1.4%
BSE FMCG 1792.82 1867.14 4.1%

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

  • Bajaj Auto has chalked out plans to set up an integrated manufacturing facility in Brazil in order to cater to the South American markets. The company is already in the process of setting up a unit in Indonesia, which will be operational by the end of FY07. However, the company is yet to decide whether it will collaborate with a local partner or set up the plant on its own. The investment required to set up this plant has been estimated at around Rs 3 bn. It must be noted that Brazil has a market for 1 m two-wheelers and currently, Bajaj Auto has a small presence in this market. Hence, this venture is likely to contribute to the topline over the long-term. The stock closed 1.4% higher week-on-week. Other auto stocks.

  • Software major TCS has acquired two customers in Latin America, the deal size of which has been pegged at US$ 30 m. The first deal involves conducting BPO and IT operations for Transantiago, which is an integrated public transportation system planned for Santiago, Chile. The second is a five-year contract with a leading banking and financial group, under which TCS will manage the company's back office operations. This is a positive for TCS, which is looking to double its revenues from the Latin American markets to US$ 100 m. The stock closed 0.5% higher week-on-week. Other software stocks.

    Top gainers during the week (BSE-A)
    Company Price on
    June 16(Rs)
    Price on
    June 23(Rs)
    H/L (Rs)
    BSE-SENSEX 9,885 10,401 5.2% 12,671 / 7,034
    S&P CNX NIFTY 2,890 3,043 5.3% 3,774 / 2,162
    HMT LTD 43 64 49.0% 111 / 38
    BIRLA CORP 190 240 26.5% 413 / 164
    VISUAL SOFT 69 85 24.5% 266 / 58
    INDIA CEMENTS 131 161 22.5% 250 / 71
    NEYVELI LIGNITE 56 68 22.2% 100 / 47

  • Steel major SAIL is planning to enter into an alliance with Jaaiprakash Associates for its proposed cement joint venture at Bhilai. SAIL would hold 26% stake in this joint venture and will bring in Rs 100 m as equity capital as an initial investment. The capacity of the plant is likely to be 2 m tonnes (MT) annum and is slated to go on stream by FY09. It must be noted that the proposed plant will be using the slag generated by the Bhilai Steel Plant. The aim behind this move is to ensure proper utilisation of slag as disposal of the same was proving to be difficult for SAIL. But in our view, cement is not the core area of operations and to that extent, we remain cautious. The stock closed 10.9% higher week-on-week. Other steel stocks.

Top losers during the week (BSE-A)
Company Price on
June 16(Rs)
Price on
June 23(Rs)
H/L (Rs)
BHARAT FORGE 338 313 -7.3% 485 / 221
VOLTAS 854 796 -6.9% 1,110 / 224
STERL BIOTECH 109 103 -5.7% 179 / 83
CONTAINER CORP 1524 1437 -5.7% 1,950 / 910
ENGINEERS INDIA 531 504 -5.0% 1,020 / 360

What should investors do? In our view, whether index is at 10,000 or 50,000, it is not of significance (do not understand what is psychological in index levels). When the index was above 12,000 (again was a psychological level!), the index target was 14,000 for some and 16,000 for many. Do not get swayed by the level of the index. Even at current levels, valuations of stocks from sectors like construction, cement, FMCG and automobiles are rich. Usually, higher inflation and rising interest rates are considered unfavorable for sectors that are dependent on consumer spending. So, it is pertinent to choose stocks that are relatively less affected by these macro factors and at 'comfortable' valuations to benefit in the long-term.

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