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Life must go on!

Jul 9, 2005

It was a rather volatile week for investors, as they witnessed a roller coaster ride on the bourses. While it was the 10th straight week of gains for the BSE-Sensex (!), which managed a real close finish, ending the week with a mere 1-point gain, the NSE-Nifty was not so lucky and lost about 1%. However, the big event this week that threw markets across the globe off their feet was the terror attack on the financial capital of the world, London. However, markets were quick enough to get back on their feet and live true to the age-old adage, 'Life must go on'! Indian stockmarkets began on a buoyant note this week as expectations of strong 1QFY06 results from India Inc. aided investor sentiment, helping the markets achieve new all-time highs and also close at their all-time highs. The story continued into Tuesday's early trade also, as markets began on a firm note with the Sensex breaching the 7,300 mark, re-writing history in the process. However, fears pertaining to the development at Ayodhya, provided investors enough reasons to book profits at higher levels. As the trading day progressed, this turned into a full-blown profit booking exercise with the markets nose-diving into the negative territory. However, setting aside the Ayodhya issue, market sentiments soon stabilised as bulls were back in action in Wednesday's trade.

While Thursday seemed once again a day of profit booking as stockmarkets treaded rather weak, the blasts in London turned the tables on the bulls. Markets, not just in India, but also across Europe, went into a tailspin as the terror attacks brought to the fore the horrific reminiscence of 9/11. The Indian indices cracked as index heavyweights fell like ninepins. Just to put things in perspective the impact of the sell-off witnessed in index heavyweights, ONGC (5%), Reliance (5%), NTPC (3%), Wipro (4%) and HLL (3%) were responsible for shaving over 125 points off the Sensex, which lost about 140 points on Thursday. However, once again, investors put aside their fears as stockmarkets bounced back on Friday despite crude prices trading at record levels of US$ 62 per barrel mark

However, the real story this week was in mid-cap stocks. Recouping from the lacklustre activity witnessed in these over the last few weeks, which had given birth to a lot of skepticism about this segment of the market being particularly overheated, the gains this week (3.6%) belied all those who thought so. Just to put things in perspective, in the month of June 2005, while the NSE Nifty gained over 6%, the CNX Mid-cap 200 index gained a mere 0.3%. However, diagonally opposite to this, in the month of July 2005 as yet, while the NSE Nifty has lost 1%, the latter has gained more than 5%. However, investors must note that we continue to believe that this segment of the market does warrant serious caution at the current juncture. Though there will be (and probably are) stock specific value plays, investors must clearly steer away from the 'me-too' category of stocks, which have been hogging the limelight on the bourses.

Apart from all of the above, one factor, whether terror or no terror, or whether the monsoons are surplus or deficit, has always managed to stay at the top i.e. Foreign Institutional Investors (FIIs) inflows. The relentless FII inflows continued right through the week, as they pumped in another Rs 14 bn in the first four trading sessions of the week. In fact, they were big buyers even on the ill-fated Thursday when the markets cracked over 2%. With this week's inflow, FII investments in Indian equities have crossed the US$ 5 bn mark in 2005! However, the saga at the mutual funds (MFs) end continued this week also with net sales of Rs 2 bn.

Top gainers over the week (NSE-50)
COMPANY Price on July 1 (Rs) Price on July 8 (Rs) % CHANGE 52-WEEK H/L (Rs)
BSE-SENSEX 7,211 7,212 0.0% 7,309 / 4,723
S&P CNX NIFTY 2,212 2,196 -0.7% 2,239 / 1,473
ABB 1,331 1,490 11.9% 1,525 / 650
ZEE TELE 155 170 9.7% 189 / 120
MTNL 119 127 7.1% 170 / 110
VSNL 251 267 6.2% 281 / 155
SAIL 48 51 5.6% 70 / 25

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

  • M&M, India's largest tractor manufacturer, is planning to acquire Universal Tractors Ltd, a Romania based tractor manufacturer. This move augurs well for M&M, as it would give the company a foothold in East European markets and can also be used as a low cost supply centre to cater to the needs of Western European nations as well in the future. Apart from this, the company is contemplating listing three of its group companies namely, Mahindra British Telecom (MBT), Mahindra Financial Services and Mahindra Automotive Steels (MASPL). This would enable it to unlock the value in these companies. To put things in perspective the consolidated net profit of the Mahindra Group at around Rs 7 bn is almost 40% higher than the stand-alone earnings of the company. The stock ended with 6% gains during the week and has gained over 35% over the last couple of months. Other auto stocks during the week.

  • Strong domestic growth prospects and increasing importance in the parent's global ambitions are seemingly the factors that have fuelled gains in ABB, the leading supplier of equipments for power transmission and distribution (T&D) purposes. Considering large-scale investments in the power sector, investors have been pretty optimistic on the stock. At the end of 1QCY05 (December ending fiscal), ABB had an outstanding order book of Rs 15.8 bn, which was almost 70% of the company's CY04 revenues. Despite all this buoyancy, investors should note that the order book position cannot rise at a much faster rate than what is executable and therefore, they have to be realistic with respect to the order book growth. Nonetheless, apart from being the largest gainer (up 12%) this week amongst the index stocks, it has gained approximately 65% in the last 6 months. Other engineering stocks this week.

  • International long distance major, VSNL, was also amongst the biggest index gainers this week. While there was no major positive to warrant the up-move in the stock, the gains seemed an over-reaction to a couple of developments. One, VSNL is on the verge of acquiring the second telecom operator's license in South Africa. This license will permit VSNL to enter all the segments except mobile telephony in the African nation. Secondly, the company has completed the acquisition of Tyco Global Network (TGN), an undersea cable network that spans a length of 60,000 kms. After the government opened up the ILD segment for private sector participation in 2002, the company has faced immense competitive pressure. The acquisition of TGN will, thus, bring some respite to the company as this makes it one of the world's largest providers of submarine cable bandwidth. The stock gained 6% this week and has gained 37% in the last 3 months. Other telecom stocks during the week.

    Top losers over the week (NSE-50)
    COMPANY Price on July 1 (Rs) Price on July 8 (Rs) % CHANGE 52-WEEK H/L (Rs)
    ONGC 983 920 -6.4% 1,034 / 625
    MARUTI 472 448 -5.0% 508 / 338
    HLL 165 159 -3.8% 170 / 101
    REL. ENERGY 650 626 -3.8% 707 / 436
    BAJAJ AUTO 1,387 1,342 -3.3% 1,400 / 795

Going forward, as Indian stockmarkets continue to make new highs almost everyday now (!), we anticipate tougher times for investors to identify stocks where significant value/growth remains, as most of them have run up quite substantially. In the immediate term, while the outcome of India Inc.'s financial performance scorecard would decide the market movements, we would advise investors to take a long-term approach while investing. While investment in equities was never risk-free, this is compensated for by the higher returns. The risks can surely be mitigated to a large extent by following a disciplined, staggered and fundamental investment approach, which is an optimum strategy, especially for a retail investor, for whom, preservation of capital is as much important as earning decent returns on the same. However, one thing that investors must always remember is to investigate before investing! Happy investing!


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