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The expectation game starts... - Views on News from Equitymaster
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  • Jul 8, 2006

    The expectation game starts...

    While the Indian stock market was not generous to investors (declined week-on-week), the rain gods gave a handful to Mumbai and as usual, the city choked! This did have an impact on the daily volumes traded, which was low in the first three days of the week, only to gain momentum in later half. The coming week will see many corporates, starting with the technology companies, announcing their first quarter results for the fiscal year 2007. We expect a mixed show.

    Despite a weak start, there was selective buying interest in some sectors. But sentiment was dampened following the Prime Minister's decision to keep disinvestments of public sector units on hold (read Neyveli Lignite Corporation). This time, it was only not only the 'Left' that was 'as usual' against the move, but also an important ally from Tamil Nadu (DMK). Incidentally, DMK was a strong supporter of disinvestments of PSUs under the erstwhile NDA government. Besides these domestic concerns, global factors such as North Korea testing missiles and renewed worries about interest rates increasing in Japan added to the nervousness. In this backdrop, it was a tug-of-war between the bulls and the bears with bears winning the battle towards the end of the week.

    As per the official numbers declared yesterday, the wholesale price index (WPI) fell to 4.84% for the week ended June 24 from 5.44% in the previous week. If investors recollect, the stock market was worried about WPI crossing the 5% mark and further rises may be on the anvil. But as we had mentioned in our previous weekly roundups, inflation (on a weekly or on a monthly basis) can be volatile because of the seasonality factor. So, one should not focus too much on these weekly numbers. Given the fact that the WPI is well within the Reserve Bank of India (RBI) target of 5% to 5.5% for 2006, there is nothing to panic for now.

    As far as the institutional activity on the bourses is concerned, as compared to the last week, FIIs were net buyers this week to the tune of Rs 8.5 bn. This week, domestic mutual funds also turned out to be the net buyers (Rs 3 bn).

    Net investments
    (Rs m) FIIs MFs Total
    29-Jun-06 (2,803) (387) (3,190)
    30-Jun-06 1,063 429 1,492
    3-Jul-06 2,548 4,337 6,885
    4-Jul-06 2,147 (601) 1,546
    5-Jul-06 5,559 (685) 4,874
    Total 8,514 3,093 11,607

    The benchmark BSE-Sensex closed down during the last week by 0.9%. Amongst sectoral indices, the BSE Bankex index was up by 0.4%, rest all the stocks were down as compared to the previous week. Despite interest rate related concerns, there was selective buying in banking stocks on account of value buying for the long-term. This is especially considering the fact that banking stocks have been under significant pressure since May 2006.

    Key indices over the week
    Index Price on June 30(Rs) Price on July 7(Rs) % Change
    BSE Small-cap 5,357 5,239 -2.2%
    BSE Mid-cap 4,381 4,328 -1.2%
    BSE METAL 8,455 8,294 -1.9%
    BSE HEALTHCARE 3,132 3,098 -1.1%
    BSE PSU 4,950 4,902 -1.0%
    BSE IT 3,743 3,702 -1.1%
    BSE AUTO 4,754 4,643 -2.3%
    BSE OIL&GAS 5,293 5,175 -2.2%
    BSE BANKEX 4,349 4,368 0.4%
    BSE FMCG 1,950 1,941 -0.5%

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

    • Domestic pharma Ranbaxy has received US FDA approval to manufacture and market the generic version of the drug, 'Cefprozin'. The brand name of this drug is 'Cefzil' and belongs to the innovator company, Bristol Myers Squibb. The total market for this drug is estimated at US$ 93 m. This news comes as a positive for Ranbaxy, and will enable it to boost its revenues from the highly competitive US generics market. The stock closed 2.7% lower week-on-week. Other Pharma stocks.

    • Engineering major, BHEL, has secured 2 contracts worth Rs 2.2 bn for power projects in Afghanistan. The first project is from Power Grid Corporation of India (PGCIL) for setting up a substation in Kabul. The second project is from Water and Power Consultancy Services (WPCS) for supply and installation of equipment for the 42 MW Salma hydel project. BHEL's scope of work in the fist project includes design, manufacture, supply and commissioning of a 220 kv substation. Besides this, the company will also supply turbines and generators for the Salma project. It should be noted that at the end of FY06, BHEL's order book size was Rs 376 bn, which is thrice its FY06 sales. The company has also spread its wings across other regions like South America, Indonesia, Oman and Europe, which shall help in diversifying its revenue base away from the Indian market. The stock closed 3.1% lower week-on-week. Other Engineering stocks.

      Top gainers during the week (BSE-A)
      Company Price on
      June 30(Rs)
      Price on
      July 7(Rs)
      H/L (Rs)
      BSE-SENSEX 10,609 10,510 -0.9% 12,671 / 7,123
      S&P CNX NIFTY 3,128 3,076 -1.7% 3,774 / 2,171
      NESTLE 996 1,107 11.1% 1,348 / 700
      ARVIND MILLS 58 64 10.0% 144 / 52
      ZEE TELE 241 259 7.3% 306 / 139
      JINDAL STEEL 1,406 1,500 6.7% 2,180 / 915
      P&G 815 869 6.6% 1,160 / 628

    • HCL Technologies, the country's fifth-largest software services exporter, has bagged a US$ 780 m outsourcing deal with Skandia, a financial services firm owned by Old Mutual. However, the company is yet to confirm this development. Skandia focuses on advising consumers on savings solutions and designing products to meet their requirements. This is the largest outsourcing deal signed by an Indian software services firm till date, dwarfing TCS' Euro 200 m (approximately US$ 255 m) deal with ABN Amro bagged last year. The contract involves all aspects of outsourcing services, from IT, BPO and remote infrastructure management. The deal catapults HCL Technologies into a different league, with annual revenues from the transaction expected to significantly bolster its topline. The stock closed 2.2% lower week-on-week. Other Software stocks.

      Top losers during the week (BSE-A)
      Company Price on
      June 30(Rs)
      Price on
      July 7(Rs)
      H/L (Rs)
      RAMCO SYSTEMS 188 170 -9.5% 547 / 142
      MPHASIS BFL SOFT 152 138 -9.0% 229 / 118
      WIPRO 514 469 -8.7% 599 / 345
      NEYVELI LIGNITE 63 58 -7.8% 100 / 47
      ADANI EXPORT 130 121 -7.2% 199 / 48

    • Steel major SAIL has outlined an Rs 18 bn plan to mine up to 7 million tonnes (MT) of iron ore from the Chiria mines in Jharkhand. These mines have proven ore deposits of 1.8 bn tonnes, with its iron ore content being a healthy 63%. This makes them the world's second largest deposits of high-grade iron ore after those in the Urals. SAIL is looking to capitalise on the Chiria mines to feed its Bokaro and Burnpur plants. It must be noted that the company has chalked out plans to increase its capacity from the current 13 MT to 22.5 MT by FY12 and would need about 37 MT of iron ore by that time. Its current mines together supply around 30 MT. The stock closed 3.4% lower week-on-week. Other Steel stocks.

    The coming week will see a number of companies announcing their quarter results for June 2006. As usual, the expectations game has started with 'experts' predicting what each company could report as the EPS for this quarter (never mind that quarterly estimates are seldom correct). We suggest that investors should not to get into this 'consensus' business and rather understand what influenced the company's performance in the past and how these factors are likely to pan out over the next two to three years. Companies plan with a five-year perspective and in this context, why so much of importance is being assigned to the EPS for one quarter is beyond our understanding.

    Looking at the markets, what we can say is that investors have to be patient and need to tread with caution with their capital. Invest in sound and strong managements and business models and give your investment time to grow. Investing in equities need to be undertaken to meet your long-term financial goals. Well, losing some money is an inevitable part of investing. But that should not deter you from planning for your long-term needs. Happy investing!



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