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Defying gravity! - Views on News from Equitymaster
 
 
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  • Jun 25, 2005

    Defying gravity!

    It was a week of records on the bourses as the bull mania continued this week, also helping the Sensex mark its 8th straight week of gains! This is the first time in this rally (since April 2003) that the index has sustained its gains for such a long time on a weekly basis. Continued strong FII inflows pushed the markets into a new orbit, in the process, breaking records. Both the benchmark indices made new lifetime highs this week.

    It was party time for the bulls on Dalal Street, as the Sensex managed to achieve the much-awaited 7,000 levels this week. Led primarily by the strength in Ambani Group stocks, which have a high weightage in the Sensex (RIL and REL have a combined weightage of about 10%), the Sensex breached the coveted mark in the first trading session of the week. Despite the small corrections, buying support at lower levels helped the markets to not only sustain but also build on their gains. The day went down in history as the Sensex closed at its all-time high (!), though below the 7,000 mark. However, history was re-written on Tuesday and then Wednesday again as the Sensex kept scaling newer highs. Wednesday was another occasion to celebrate as the Nifty too scaled newer peaks. Though Thursday saw some correction, the losses were more than recouped on Friday as the Sensex got closer to the 7,200 mark and the Nifty breached the 2,200 levels in intra-day trades!

    The prime reason for the rally having sustained this far is the sustained FII inflows that continue to flow into Indian equities (see chart above). As per reports, apart from the Japanese funds that have seemingly diverted their money to India from China in wake of the uncertainties which have cropped up in case of the latter, many FIIs from across countries like Europe, Australia, Canada, etc. have been bringing India under their investment radar. The fancy for Indian equities is seemingly derived from the fact that India continues to remain one of the fastest growing economies in the world and FIIs would want to participate in the Indian growth story. However, one grey area that prevented this week’s rally from being a broad based one was the fact that mid-cap stocks refused to participate for major part of the week. However, some buying was witnessed on Thursday and Friday, helping the CNX Mid-cap 200 index close with 1% gains for the week.

    Top gainers over the week (NSE-50)
    COMPANY Price on June 17 (Rs) Price on June 24 (Rs) % CHANGE 52-WEEK H/L (Rs)
    BSE-SENSEX 6,907 7,149 3.5% 7,178 / 4,614
    S&P CNX NIFTY 2,123 2,194 3.3% 2,204 / 1,438
    CIPLA 285 314 10.3% 322 / 195
    HLL 149 163 9.3% 170 / 101
    HERO HONDA 551 602 9.2% 616 / 411
    RELIANCE 600 655 9.1% 660 / 400
    REL. ENERGY 592 645 8.9% 707 / 436

    Coming to some sector/stock specific developments this week:

    • The suspense over the Reliance saga finally came to an end last weekend with the Ambani brothers coming to a seemingly amicable final settlement by agreeing to split the conglomerate. Mr. Mukesh Ambani will have the responsibility for Reliance Industries and IPCL while Mr. Anil Ambani will head Reliance Infocomm, Reliance Energy and Reliance Capital. The settlement boosted investor confidence in the company as the respective businesses are now set to have focus on governance. All the Reliance group stocks were in significant favour this week, with Reliance Capital going through the roof having gained almost 45%!

    • The much-awaited fuel price hike finally materialized this week, with petrol and diesel prices being raised by Rs 2.5 and Rs 2 a litre respectively. This comes after the government had frozen prices of these fuels for seven months, even as global crude prices touched all-time highs. Oil prices have soared to a new record of over US$ 59 a barrel (advantageous for ONGC – up 5%) and have risen by over 20% since the government last allowed oil companies to increase fuel prices. Cooking gas and kerosene prices have remained unchanged. However, oil marketing companies’ stocks like BPCL, HPCL and IOC remained out of favour. This pessimism towards downstream oil companies was owing to the fact that the increase in oil prices is much lower than expected. Thus, even after the said increase, oil-marketing companies are expected to continue to incur a loss of Rs 2.2 per litre on petrol and Rs 3 per litre on diesel. Energy stocks this week

    • Tata Steel (up 7%), a dominant player in the Indian steel industry, is contemplating its second overseas acquisition. It is on the look out for a company having capacity to produce 2 to 3 million tonnes of steel per annum. The company is eyeing the South East Asian region and China for the same. It should be noted that the company had last year acquired NatSteel in Singapore. These acquisitions will benefit the company in the long run as it will not only provide access to different markets but also a multi-locational production schedule which can enable it to improve on its operational and transaction costs. Steel stocks this week

      Top losers over the week (NSE-50)
      COMPANY Price on June 17 (Rs) Price on June 24 (Rs) % CHANGE 52-WEEK H/L (Rs)
      BHEL 875 849 -2.9% 949 / 425
      OBC 268 261 -2.6% 382 / 200
      HDFC BANK 597 582 -2.5% 632 / 341
      HPCL 321 314 -2.3% 417 / 262
      PNB 395 388 -1.7% 520 / 220


    • Hero Honda has launched 'Glamour', its 125-cc motorcycle. The company has positioned it in the deluxe segment (Rs 42,000 to Rs 48,000 price range) of the motorcycle market. The company intends to make a foray with 'Glamour' in the southern markets initially, before establishing a nationwide presence. As new product launches provide a significant boost to the revenues, this initiative could augur well for Hero Honda. The stock was on the investor radar this week (up 9%), as the beginning of the monsoons could have also aided sentiments, considering that rain dependant rural markets contribute a significant chunk of two-wheeler volume sales. Auto stocks this week

    Going forward, while the markets have continued to defy gravity as yet, with the Sensex gaining almost 1,000 points in under 2 months, the risks associated with investing at current levels seem to have increased. While the index valuations at about 13 times FY06 expected earnings does not seem to be a screaming sell, considering that historically, our markets have traded in the region of about 15x to 17x earnings, at the same time, investors must understand that an index is a basket of stocks, many of which could be (or rather are) over valued. It wouldn’t be wrong to assume that many of these stocks are rising largely owing to their presence in the benchmark indices. This is because most of the FIIs, which invest in large caps, invest in index stocks.

    Further, a close watch is warranted on the global liquidity factor, which is amongst the biggest reasons for the meteoric rise of Indian stockmarkets. While we would not advise investors to sit on total cash, we would certainly caution them and advise them to follow a staggered long-term investment approach to create wealth. Happy investing!

     

     

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