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Stock markets: Weathering the storm

Jul 2, 2004

While low volumes and increased volatility typically characterized the month of June on the stock markets, BSE-Sensex finally ended in the positive territory, registering gains of over 2%. Amidst all this, there remained certain stocks that outperformed the indices and rewarded investors with significant gains. Let us have a look at the five top gainers on the Sensex over the past one month and reasons behind the same.

 31-May-041-Jul-04% Change
SENSEX4,760 4,872 2.4%
BHEL435 523 20.2%
Reliance Energy486 571 17.5%
MTNL112 130 16.1%
Hero Honda446 504 13.0%
HPCL301 339 12.6%

Stocks from the power and allied sector were one of the worst hit on the bourses during the recent bear phase. This was largely due to doubts over the continuity of the power sector reforms, especially the possibility of a review of Electricity Act, an act that was believed to take the sector towards a new growth trajectory. Therefore, while correction was being anticipated, such a steep fall especially among fundamentally stronger stocks was an over reaction of sorts. As a result, there happened an upward correction thus pushing companies such as BHEL and Reliance Energy to top of the gainers pack.

Gains in Reliance Energy could also be attributed to the fact that the company signed an agreement with Uttar Pradesh for supplying 40% of the electricity that would be generated from its gas based power plant to be built in the same state, thus resulting into an assured revenue stream for the company for 40% of its output. MTNL, the leading fixed line services provider in the twin metros of Delhi and Mumbai, emerged as the third highest gainer with gains of 16%. With telephone densities in the metros reaching saturation levels and also private players coming in, the stock had fallen out of favor with investors in recent times. However, thanks to substantial improvement in its FY04 operating margins and consequently the profitability and also possibility of its merger with BSNL, the stock had come back on the investor's radar. While the net addition in its subscribers is heartening, it remains to be seen whether this is sustainable over the long-term, especially with competition from the likes of Bharti Tele, Tata Tele and Reliance. Investors would do well to keep this in mind while looking at the stock as an investment option for the long term.

With competition intensifying and question marks arising over the future of the company post the termination of its contract with Honda, Hero Honda, India's largest two-wheeler maker was facing pressure on the bourses. But not anymore. While the technical co-operation with Honda has been extended to 2014, the company also recorded a healthy 30% YoY growth in sales volumes in the month of May and 25% in June, thus giving investors enough reasons to buy back into the stock. As a consequence, the stock appreciated 13% and emerged as the fourth highest gainer on the bourses. As far as the future growth prospects are concerned, although the company may not be able to repeat the growth story of the late 90s and early 2000, its consistently high dividend payouts (1000% in FY04) and continued technical inputs from Honda, the world's leading bike manufacturer, makes it a relatively safer bet than its peers.

Tensions in the Middle East coupled with rising demand from China had seen crude oil prices touching record highs in recent months. However, owing to political compulsions, domestic companies were not allowed to hike prices, thus affecting their profitability and eventually their performance on the bourses. But ultimately sanity prevailed and the government announced a slew of measures including price hikes and duty cuts, thus giving oil companies some breathing space. These measures shall not only help the companies reduce costs by way of duty cuts but at the same time boost marketing margins. The buying therefore seemed to be a result of these positive developments. However, concerns over government interference over pricing and competition from the private sector might scuttle growth prospects.

Overall, risks outweigh positives in the medium-term and therefore, the worst may still not be behind. So what does the future look like? Although the markets seem to be waiting for the budget for a clear picture to emerge, we believe that if the CMP (Common Minimum Programme) is anything to go by, the possibility of the FM announcing some really market moving measures is remote. So rather than waiting for the announcement of the budget, take advantage of the attractive valuations (from a medium to long term perspective) and invest in a staggered manner in companies with strong fundamentals and competent management.

  

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