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Bulls on steroids! - Views on News from Equitymaster
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  • Jul 2, 2005

    Bulls on steroids!

    This is the best way to describe the relentless rise witnessed in the stockmarkets. The markets have belied, as yet, every participant who believes that they are ripe for a correction. The indices continued to defy the laws of gravity this week by notching gains of about 1% each. Further, mid-cap stocks, which had been at the receiving end for sometime now, showed signs of life in the latter part of the week. Foreign Institutional Investors (FIIs) have been the sole drivers of this leg of the rally.

    Despite an apprehensive start in early trades on Monday morning, the markets soon began their upward journey and did so until halfway through the trading session. In the process, both the benchmark indices, the Sensex and the Nifty, achieved new lifetime highs. However, soon thereafter, a strong bout of profit booking saw them lose all of their gains. This process of profit booking continued right through Tuesday's trading as investors opted to convert some of their investments into cash. This is because, with every rise in the market, increasing number of market participants have been turning bearish, which seemingly culminated into the sell-off on Tuesday with the Sensex losing more than 100 points. However, the point to be noted here is that on Tuesday too (like Monday), while the FIIs continued to buy equities, MFs maintained their supply and remained net sellers.

    Though, Tuesday's big correction may have given the bears a good enough reason to party, the bulls were adamant on intruding and spoiling the same. This led to the 3 straight sessions of strong gains for the Indian stock markets thereafter with the NSE-Nifty making new lifetime highs on Thursday while the BSE-Sensex doing the same on Friday. The prime reason for the current strength is the unabated inflows of foreign institutional money into Indian equities. In fact, if we consider the 23 trading sessions of June 2005, while the FIIs have bought on every single day, mutual funds (MFs) were net buyers in only 6 of these! Further, even if we consider the year 2005 to date, FIIs have pumped in over US$ 4.5 bn (about Rs 200 bn) while MFs have invested close to US$ 1.2 bn (Rs 52 bn). The number for MF investments would have been much better if not for the Rs 18 bn worth of net sales they have made in the month of June 2005. Nonetheless, with the gains this week, the Sensex has now gained for 9 straight weeks (!), a feat, which was achieved earlier only on two occasions in the last decade (since 1996) - in early 1998 and late 2001, when the Sensex had gained for 11 straight weeks!

    Top gainers over the week (NSE-50)
    Company Price on
    June 24 (Rs)
    Price on
    July 1 (Rs)
    H/L (Rs)
    BSE-SENSEX 7,149 7,211 0.9% 7,229 / 4,723
    S&P CNX NIFTY 2,194 2,212 0.8% 2,226 / 1,473
    GLAXO 791 857 8.3% 862 / 561
    VSNL 232 251 8.2% 252 / 155
    COLGATE 235 250 6.6% 254 / 123
    HDFC BANK 582 618 6.1% 643 / 341
    BAJAJ AUTO 1,319 1,387 5.2% 1,395 / 795

    Now let us consider some sector/stock specific developments this week.

    • The L&T stock has been in the limelight in recent times. The stock gained over 4% this week. The stock has been buoyant on account of a few big orders won by the company recently, notable among them being the two contracts worth Rs 7 for road development project and building of a flyover for NHAI and the US$ 19 m order for construction of cement plant in Oman. Further, L&T is firming up its plans of overseas foray in order to achieve its target of 25% revenue share from exports (currently 19%). For growth of the same, the company is targeting the Gulf countries and China and has drawn up requisite plans. Engineering stocks this week

    • Bharat Forge, a global player in the auto ancillary sector, acquired US-based Federal Forge Inc. for US$ 9.1 m. It must be noted that in 2004, the company had acquired Carl Dan Peddinghaus GmbH (CDP), which is a leading player in Europe in the passenger car forgings business. With the company's continuous thrust on expanding its geographical reach, this move is a positive step, as it will enable Bharat Forge to establish a footprint in the US, which is one of its largest markets. In related auto sector news, June volume sales numbers of auto majors have been released. While Hero Honda recorded a growth of 13%, Bajaj Auto (up 26%) and TVS Motor (18%) reported better numbers. Auto stocks this week

      Top losers over the week (NSE-50)
      Company Price on
      June 24 (Rs)
      Price on
      July 1 (Rs)
      H/L (Rs)
      SAIL 52 48 -7.1% 70 / 25
      TISCO 363 344 -5.2% 447 / 187
      GUJ. AMBUJA 63 60 -4.7% 66 / 35
      GRASIM 1,099 1,061 -3.5% 1,404 / 929
      HERO HONDA 602 583 -3.1% 616 / 411

    • In wake of the build up of steel inventory and increasing fears of a supply glut in the future, steel prices over the past few months has been in correction mode, which has affected steel stocks the world over. However, despite the already significant fall in prices, the woes for the steel sector do not seem to end. In a related development, the Indian steel producers have reduced prices in the region of Rs 500 to Rs 3,000 per tonne effective July to bring it at par with the landed cost of imports. It must be noted that this move comes just a couple of days after the South Korean steel major, Posco, announced a reduction in prices. Going forward, with protection from import tariffs now much lower than what it was a couple of years ago, any significant movement in steel prices (on either side) is likely to get reflected in domestic steel prices. Steel stocks this week were under the hammer

    • The final seal on the merger of Bank of Punjab with Centurion Bank was put this week with the share swap ratio being fixed at 4:9 (9 shares of Centurion Bank for every 4 shares of Bank of Punjab). The merged entity will be called Centurion Bank of Punjab. The merger is expected to lend Centurion Bank the requisite presence in northern India with a network of 235 branches and 382 ATMs. Also, the merged entity will have a comfortable capital adequacy ratio of 16%. The net NPA to advance ratio of the entity (3.6%) will be relatively higher as compared to its peers in the private banking industry. On the bourses, while the Centurion Bank stock lost 6% this week, Bank of Punjab closed lower by 2%. Banking stocks this week

    Going forward, our stance towards equities at the current levels remains that of caution. While this should not be construed as that we are bearish on Indian equities, however, we do definitely believe that considering the sharp rise in the value of equities over the last couple of years, which has been driven largely by foreign money, the situation definitely warrants a much higher degree of caution. In light of the concerns with respect rising US interest rates and FII flows reversing their direction, thus leaving local investors in the lurch, we suggest that investors should not bank on just FII inflows to drive markets to new highs. It is pertinent for investors to bear in mind that about 25% of all FII inflows is believed to be that of hedge funds, whose repute of being ‘fair-weather-friends' is well known. Thus, one of the best ways to deal with the situation of a possible correction in Indian stockmarkets (for whatever reason) is to invest in fundamentally strong companies' stocks, which are not at the mercy of anything, but their own performance. Happy investing!



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