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Dumbstruck! - Views on News from Equitymaster
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  • Jul 16, 2005


    That's one word that would describe our reaction to the rally being witnessed on the Indian bourses. In fact, more than the stockmarket gains, it is the pace at which these have been coming. With the current week's near 1% gains, the BSE-Sensex has now had an uninterrupted rally for 11 straight weeks, having gained about 17% so far. On the other hand, while the NSE-Nifty (up 1% this week) too has gained over 15% in the same period, it has had minor corrections along the way. The CNX Mid-cap 200 Index also gained 3% this week. Relentless FII inflow is the major driving force behind the stockmarket rally on the Indian shores.

    Markets began on a very optimistic note this Monday morning and built on the early strong gains. The Sensex gained near 100-points and closed above the 7,300 levels for the first time in history. The news pertaining to the government contemplating hiking FII limit in Indian companies to 49% seemed to have supported sentiments then. However, markets went into a freefall on Tuesday afternoon post the Sensex achieving new lifetime highs of 7,352 points as investors opted to book some profits. The weakness in technology stocks (led by Infosys) also played their part in aggravating the fall. However, buying at lower levels helped the markets not only to stabilise but also recover the losses almost entirely. This, however, could not prevent a negative closing.

    However, Tuesday's recovery was only temporary as the activity of the following two days was taken over by the bears with software stocks once again being their favourites. However, though Friday's trading was rather volatile, a sharp pullback in the closing hours of trade saw the Sensex close at its all time highs (on a weekly basis), in the process making it the 11th straight week of gains. Similar feats were achieved previously in early 1998 when the Sensex had gained 27% in 11 weeks (!) and then again in late 2001 with the Sensex notching gains of 29%! Foreign Institutional Investors (FIIs) continued to pump in money with their net buys at Rs 13 bn (approx US$ 290 m) in the first 4 trading sessions of the week (US$ 2.5 bn since June 2005). On the other hand, mutual funds (MFs) continued to be net sellers with Rs 3 bn (US$ 77 m) in the current week (US$ 650 m since June 2005).

    Top gainers over the week (NSE-50)
    COMPANY Price on July 8 (Rs) Price on July 15 (Rs) % CHANGE 52-WEEK H/L (Rs)
    BSE-SENSEX 7,212 7,272 0.8% 7,352 / 4,845
    S&P CNX NIFTY 2,196 2,213 0.7% 2,239 / 1,518
    VSNL 267 341 28.0% 364 / 157
    ACC 395 428 8.4% 440 / 225
    IPCL 173 187 7.8% 221 / 149
    TATA CHEM 172 185 7.5% 192 / 114
    RELIANCE 620 667 7.5% 675 / 415

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

    • VSNL defied all laws of investing, as the stock spurted 28% in a single week! Further, in FY06, the stock has been amongst the best performers gaining 80%! However, investors should note that there is no apparent reason for the stock to be moving up with such strong momentum. In between, though there were a couple of news that partially aided this run-up as mentioned last week, but none was enough to push such a strong surge in the stock price. Other telecom stocks this week

    • Cement major ACC announced its 1QFY06 results this week. While the topline of the company registered a 19% YoY growth buoyed by a 13% YoY increase in volumes, operating profits grew by 44% YoY. This trickled down to the bottomline, which was up a robust 72%. However, it must be noted that interest costs and depreciation charges have recorded a 5% YoY and 9% YoY rise respectively owing to the acquisition of the Wadi captive power plant and the commissioning of its Chaibasa power plant. The company has also decided to change its financial year, which will now be from January to December, in a bid to align with Holcim, which along with Gujarat Ambuja Cements, holds over 34% stake in ACC. The stock gained over 8%. Other cement stocks this week

    • Reliance Industries logged in significant gains this week (8%) and was amongst the top gainers in the index. The gains in the Reliance Industries stock was seemingly owing to the fact that the government opted to keep the private oil refining companies out of the subsidy sharing scheme for the quarter ending June 2005. It must be noted that the Reliance stock had corrected almost 7% since the petroleum ministry's statement that private companies would be asked to share the subsidy burden, which is being incurred by downstream oil companies in selling petroleum products below the import parity prices. Other energy stocks this week

      Top losers over the week (NSE-50)
      COMPANY Price on July 8 (Rs) Price on July 15 (Rs) % CHANGE 52-WEEK H/L (Rs)
      INFOSYS 2,335 2,196 -6.0% 2,423 / 1,418
      BPCL 360 341 -5.2% 475 / 276
      TCS 1,311 1,248 -4.8% 1,475 / 959
      GAIL 220 213 -3.4% 270 / 170
      HDFC BANK 652 631 -3.3% 670 / 353

    • While the markets continued to rally this week, software stocks came under the hammering, which is evident from the 4.2% fall in the BSE IT Index this week. The selling pressure in leading software stocks was the fallout of below par performance of Infosys for 1QFY06. Infosys announced its financial results for the first quarter of FY06 this week. While the bottomline seems subdued at first glance (down 5%), if one were to remove the effect to the extraordinary income in the previous quarter, the net profit growth has almost kept pace with the growth in topline (up 4%). The stock was the biggest index loser this week. Other software stocks this week

    • Yes Bank, the youngest private banking entity in the sector, got listed on the bourses this week. The stock listed at Rs 65 (over 44% premium to its offer price) on the BSE and made a high of Rs 70. It must be noted that the bank has put forward a business plan by trying to differentiate itself from a host of other players in the industry and adopting a 'knowledge banking approach'. This approach involves a team of experienced professionals with sector and banking product knowledge that would develop relationships with customers and deliver sector focused advice in food and agri-business, life sciences, infrastructure, telecommunications, media and technology, engineering, textiles and retailing sectors. It seeks to achieve a stronghold in the corporate banking space going forward. It ended the week at Rs 62 (a 37% premium). Other banking stocks this week

    Going forward, considering that the June 2005 quarter results have already started trickling in, markets would remain volatile until this results season passes away. While, India Inc. results have as yet been a mixed bag, the activity on the corporate results announcements front would only heighten over the next couple of weeks as analysts and investors alike scramble through the numbers and try to read between the lines to decide upon their future course of investment action.

    However, we continue to believe that judging a company on the basis of its one-quarter performance would be limiting one's investment horizon to mere speculation, which often leads to over-reaction or 'irrational exuberance' as they call it. As far as the quarterly results are concerned, we feel that the 'trend' emerging from quarterly results should be taken as a reference for longer-term investment decisions and one or two quarters of below average performance should not make a difference. Happy investing!



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