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Bulls back in form!

Jul 1, 2006

For the third consecutive week, the Indian stock markets showed a significant amount of volatility. The markets commenced the week in a weak mode, with the BSE-Sensex down on Monday. However, this proved to be only temporary, and towards the end of the week, the Indian indices bounced back and ended higher, as participants appeared to finally take the opportunity to buy stocks at lower levels. Mixed global markets, US interest rates, and paucity of rains in June 2006, however, kept the markets on edge. Two major announcements took place in the last week. One was the announcement made by the Reserve Bank of India (RBI) in context to the CRR in which talks were going on whether to increase the CRR rate or should the previous one prevail.

  • Click here to read more on CRR.

    On late Thursday night, the US Fed announced its policy on interest rates, inflation and the outlook for the US and global economy at the quarterly FOMC meet. This has been the major event that has kept Indian and other global emerging markets on tenterhooks over the past one-and-a-half months. For the past sixteen instances, the Fed had raised the rates by a quarter percentage point (0.25%). This time again, the Fed raised the Federal Funds rate to 5.25% and it is expected that in the next Fed meet which will going to take place in August, it will further raise the rate.

  • Click here to read more on Fed rate hike

    As far as the institutional activity on the bourses is concerned, as compared to the last week, FIIs were net sellers this week to the tune of Rs 2.4 bn. This week, domestic mutual funds also turned out to be the net sellers (Rs 3.9 bn).

    Net investments-
    (Rs m) FIIs MFs Total
    23-Jun-06 (675) (1,816) (2,491)
    25-Jun-06 70 (108) (38)
    26-Jun-06 (268) (1,275) (1,543)
    27-Jun-06 (1,110) (313) (1,423)
    28-Jun-06 (390) (387) (777)
    Total (2,373) (3,899) (6,272)

    The benchmark BSE Sensex gained during the last week by 2.0%. Amongst sectoral indices, the BSE Metal index was up by 2%, the BSE Auto Index gained 2.2 %, while the BSE BANKEX was down by 2.2%.

    Key indices over the week
    Index Price on
    June 23(Rs)
    Price on
    June 30(Rs)
    BSE Small-cap 5,534 5,357 -3.2%
    BSE Mid-cap 4,421 4,381 -0.9%
    BSE METAL 8,293 8,455 2.0%
    BSE HEALTHCARE 3,180 3,132 -1.5%
    BSE PSU 5,002 4,950 -1.0%
    BSE IT 3,627 3,743 3.2%
    BSE AUTO 4,653 4,754 2.2%
    BSE OIL&GAS 5,129 5,293 3.2%
    BSE BANKEX 4,448 4,349 -2.2%
    BSE FMCG 1,867 1,950 4.4%

    The last week was also witness to some leading corporates announcing their full year results. VSNL, Pfizer and ONGC, all surprised the stock market with their strong results. One of the biggest positives to have emerged from Pfizer's second quarter performance was the sharp expansion in operating margins, leading to strong bottomline growth of 40% YoY, excluding the extraordinary income received (including this income, profits grew at 132% YoY). At the same time, IT education and training major, NIIT also announced its results last week. The company's performance was good, with good topline growth driven by the retail segment, and operating leverage in the retail segment leading to an over-100 basis points margins expansion. This led to a strong 19% YoY growth in net profits.

    Top gainers during the week (BSE-A)
    Company Price on
    June 23(Rs)
    Price on
    June 30(Rs)
    H/L (Rs)
    BSE-SENSEX 10,401 10,609 2.0% 12,671 / 7,123
    S&P CNX NIFTY 3,043 3,128 2.8% 3,774 / 2,171
    WIPRO 449 512 14.1% 599/344
    HMT LTD 57 65 13.4% 111/38
    RAMCO SYSTEMS 165 187 13.2% 547/142
    I-FLEX SOLUTIONS 1,008 1,125 11.6% 1475/747
    AUROBINDO PHARMA 527 586 11.1% 740/285

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

    • BPCL, the country's second largest oil marketing company in terms of market share, is planning to spend about Rs 80 bn over the coming five years to upgrade its refineries and sees long-term growth prospects in natural gas. The company also aims to sell 5 m tonnes of imported liquefied natural gas (LNG) each year by 2012. With this, the company's core focus will be on refining for the next two to three years in terms of improving operational efficiencies and providing more value added products. The stock closed 3.0% higher week-on-week. Other energy stocks.

    • Coffee major, Tata Coffee, has acquired Eight O' Clock Coffee Company, (EOC), a US retail coffee major, for US$ 220 m. Tata Coffee bought the chain from Gryphon Investors, a San Francisco-based private equity firm. EOC has over 100 years of brand history and retail coffee experience in the US and is touted as the No. 1 player in the branded whole bean market and the category leader in the value gourmet segment in the US retail market. In FY05, EOC had net sales of US$ 109 m. This acquisition helps Tata Coffee to become an international and fully integrated coffee player. The company will be able to leverage its brand equity to capture new markets and new geographies. The acquisition also gives Tata Coffee an instant presence in the US$ 21 bn US coffee market. The acquisition will be financed through a combination of equity and non-recourse debt. The stock, buoyed by this news, gained as much as 27% this week. Other FMCG stocks.

      Top losers during the week (BSE-A)
      Company Price on
      June 23(Rs)
      Price on
      June 30(Rs)
      H/L (Rs)
      SYNDICATE BANK 57 50 -12.5% 104/48
      CORPN BANK 251 222 -11.5% 508/218
      LUPIN LTD 989 895 -9.5% 1275/678
      SYNGENTA IND 308 280 -9.2% 525/250
      HPCL 259 236 -9.2% 361/211

    • Diversified conglomerate, ITC, has planned Rs 10 bn investments in West Bengal. The proposed investments would be made in area of cigarette, IT, logistics, biscuits and hotels. Investment of Rs 3 bn will be made in its cigarette factory at Khidirpur in Kolkata. This represents the first major investment announcement by ITC regarding its core business of cigarettes, which accounted for approximately half of its revenues a substantial portion of its profits. The company would invest close to Rs 3.5 bn in the proposed hotel project. The company has not yet identified the area but a hotel would need close to 10 acres. The company was also planning to set up a food plant in the state, which would primarily produce biscuits and foods. The company currently has a strong presence in confectionery segment with its Sunfeast brand. ITC is also looking for an IT project that would create 1,000 jobs through its subsidiary ITC Infotech Ltd. The stock closed higher by 6% this week. Other FMCG stocks.

    So, what should investors do now? We believe that the recent correction from 12,600+ levels was very much warranted, given the rich valuations that numerous stocks were enjoying, plus the fact that this was primarily a liquidity-driven rally, and was, in many cases, totally out of sync with ground realities (fundamentals). To give an example, numerous engineering stocks were trading at obnoxious valuations of 65 times earnings! Although we are positive about the engineering sector's prospects, such valuations are completely outside our comfort zone. Therefore, with the correction, we have become comfortable with the valuations that many stocks are now trading at. At the end of the day, we are of the firm belief that over the long-term, stock prices move in tandem with fundamentals. Therefore, the best way to make money in equities is to invest in fundamentally strong companies having good management capabilities, a strong market positioning and goof future prospects. Most importantly, of course, buy such stocks at good valuations, of which there are many stocks at current levels. At the end of the day, it is the process of investing that will multiply your money in the long-term. Happy investing!

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