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Out of the woods?

Jul 17, 2004

Markets continued to grapple this week also, trying to find a direction. But, similar to their efforts in recent weeks, they failed again. Bogged down primarily by concerns related to monsoons, investors kept distance from the markets. The indices ended this week trading almost flat with very marginal gains.Now, looking at this week's trading, backed by two weeks of gains, the indices started on a subdued note. Monday's lacklustre trading could also be attributed to the investors wait for more clarity on some of the announcements made by the Finance Minister (FM) in the recently concluded Union Budget 2005. However, trades on Tuesday and Wednesday were marked by weakness, as investors seemed inclined to take some profits off the table. The markets struggled to find any reason to cheer. While uncertainty regarding any change to the turnover tax continued to remain among the reasons for the market's apprehensive behaviour, another factor and a more fundamental one - delay in monsoons - kept investors on the back foot.

Key gainers over the week (NSE-50)
COMPANY Price on
July 9 (Rs)
Price on
July 16 (Rs)
H/L (Rs)
BSE-SENSEX4,9454,9510.1% 6,250 / 3,534
S&P CNX NIFTY 1,5531,5590.4% 2,015 / 1,089
TISCO30633910.8% 490 / 183
SAIL293310.7% 62 / 19
OBC22424710.3% 367 / 149
PNB2452679.1% 397 / 149
IPCL1501627.7% 240 / 106

This was because, as per the Indian Meteorological Department, while the monsoons have been below average as yet, their distribution has also been uneven, affecting crops in various regions. There are concerns that this delay in monsoons could also affect the yield of cash crops like cotton, grains and cereals. It must be noted that in order that our economy to clock the over 7% targeted growth rate, above average rainfalls are necessary. In the event of monsoons providing a setback, it would put to doubt India's growth prospects.

Key losers over the week (NSE-50)
COMPANY Price on
July 9 (Rs)
Price on
July 16 (Rs)
H/L (Rs)
HERO HONDA502462-7.8% 544 / 235
BAJAJ AUTO915852-6.9% 1,210 / 480
M&M511477-6.7% 525 / 162
GRASIM1,025959-6.4% 1,317 / 440
BHARTI TELE158150-5.1% 189 / 37

However, Thursday and Friday's trade saw a reversal in trend of sorts as some clarity emerged over the above two issues turnover tax and monsoons. The Indian Metrological Department's statement of the monsoons resuming normalcy soon, the good 1QFY05 results as yet, by India Inc. and the news of certain breakthrough being arrived at pertaining to the transactions tax issue, all helped improve markets sentiments.

Now, considering some key movers during the week from the table above, gains in steel stocks continued despite the setback provided in the budget in the form of an increase in excise duty by 4%. However, on the back of the near-term buoyancy in the sector and with the DEPB benefits (export incentives) having been restored for the industry, the near-term positive outlook seems to have revived. As far as the banking stocks were concerned, apart from the news that an inter-ministerial committee of the government has recommended that FII holdings in banking should be kept out of the FDI limit specified for the sector, which, if accepted, could pave the way for higher investments in the banking sector, good results by UTI Bank and HDFC Bank could have lifted sentiment for the sector.

The top index losers this week included three auto stocks, which lost significant ground during the first half of the trading week (failing to recover fully) on the back of monsoon concerns, since rural demand forms an important part of two-wheeler sales. M&M's presence in the tractors segment kept the stock out of favour. Grasim's weakness, on the other hand, was owing to the announcement that the delay in monsoons has made the company cut the production of staple fibre by 80 tonnes per day. This constitutes around 11% of the company's total staple fibre production and thus, will seemingly have some financial impact on the company in the near-term, the impact of which would be seen in the September quarter results. Bharti Tele remained bogged due to profit booking as investors exercised caution towards the stock owing to continuing resistance towards the hike in FDI limit in the telecom sector, not just due to opposition from the party but also from allies of the current ruling coalition.

However, while the markets may have recovered in the latter half of this week, the chart above clearly shows that the market is stuck in a strict trading range. While Foreign Institutional Investors (FIIs) seemed to have somewhat come to terms with the budget, which is evident from their positive investments into Indian equities (Rs 3 bn) in July so far, the question remains, are we out of the woods?

Though it is nearly official now that the finance ministry has accepted the concerns pertaining to the liquidity issue owing to the turnover tax and will soon spell out the solution for this, some other distinct worries continue to remain. One being inflation that has notched up to 6.16% according to the latest numbers released, which only re-affirms the fact that hike in interest rates is imminent, which will adversely affect corporate balance sheets and low-interest rates dependant sectors like auto and housing. Second big threat is from the possibility of monsoons faltering, which would dent our GDP growth. The consensus estimates of 6.5%-7% Indian GDP growth would then have to be revised downwards. The third reason is high crude oil prices, which has once again crossed the US$ 41 per barrel mark, increasing the threat of jeopardizing global growth, leave alone India.

However, despite the above concerns, while we believe that there is really no 'big' trigger in sight for the stock market in the near-term, there are good companies/sectors available at descent valuations from a 3-year perspective at current levels. Identify those and invest in a staggered manner so that the risk is distributed over a period of time. Happy Investing!

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