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Volatility: Curbing confidence - Views on News from Equitymaster
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  • Jul 22, 2006

    Volatility: Curbing confidence

    As compared to the last fortnight, this time the markets were range bound accompanied by volatility. Markets opened the week on a negative note, which was in line with the global markets. The corporate sector performance till now has been mixed with companies from sectors like software, pharma and commodities positively surprising the markets. But companies from infrastructure failed to enthuse investors.

    After a five-day losing streak, domestic markets gained significantly on Thursday. This was largely attributed to the recovery in the world markets (especially US). Though the US Federal Reserve Chairman gave a 'toned down' view on inflation and the need to approach the hike in interest rate in a balanced manner, the underlying economic data continues to emanate mixed signals. Post the sharp spurt on Wednesday, the US markets witnessed profit booking on Thursday and Friday. The Indian markets followed suit. We are not necessarily concerned about the decline in the stock market. We are largely concerned about the extent of volatility on a day-to-day basis, which can have a negative impact on investor confidence.

    Beside these two factors one of the most important factor, which led the markets on 'Roller coaster ride', was the statement passed by 'US Fed Chief Ben Bernake'. The chief mentioned that the Fed might end its two-year long series of rate hikes. Following the statement by the Mr. Bernanke that Federal Reserve may end its interest rate hike, the Sensex moved up by 346 points or 3.45% at 10,353 points. While stocks from sectors like metals, banking and FMCG sector rose ahead of the market (by 3% to 5%), capital goods, pharma, software, and auto stocks gained almost 2%.

    As compared to the previous week, the WPI was 4.68% lower than 4.96% last week, largely due to the softening of food prices. As we had mentioned in our earlier weekly round-ups, inflation analysis on a week-on-week basis may not be the right approach owing to seasonality in prices. What is important to focus is whether inflation is in line with the RBI's projections and the threats to inflation for the rest of the fiscal year (this is called inflationary expectations). Perhaps the biggest factor that could push inflation to a higher trajectory is crude prices. The Israel-Lebanon issue has moved to the next level, with Israel possibly looking at invading Lebanon. It remains to be seen how this issue pan out over the course of the fiscal year.

    As far as the institutional activity on the bourses is concerned, FIIs were net sellers to the tune of Rs 11 bn. This week, domestic mutual funds were also net sellers (Rs 6 bn). Considering the volatility and dismal performance by some mutual funds, there has been a significant increase in redemption request, which is forcing mutual funds to sell stocks. The interest of investors in general can also be gauged from the daily volumes on the bourses. As per the NSE website, the traded value in the cash market on the NSE on July 21st stood at Rs 5.0 bn, which is almost 55% lower than the traded value on April 21st 2006! Even volumes in terms of quantity traded are also lower by 30% as compared to April 2006, indicating the fact that investors are adopting a wait and watch approach.

    Net investments
    (Rs m) FIIs MFs Total
    13-Jul-06 141 (160) (19)
    14-Jul-06 (3,436) (242) (3,678)
    17-Jul-06 (5,676) (383) (6,059)
    18-Jul-06 (3,071) 1,420 (1,651)
    19-Jul-06 899 (1,255) (356)
    Total (11,143) (620) (11,763)

    The benchmark BSE-Sensex was down 5.5% last week. Amongst sectoral indices, the least affected was the BSE Bankex, which was down only by 1.8%! BSE Metal fell by 8% followed by auto and energy (both down 7%). Despite robust volume growth in the first quarter of the calendar year, auto stocks are being hammered. We attribute the same to the fears of interest rates rising faster, which in turn could slowdown demand. We also remain concerned about the sustainability of current volume growth.

    Key indices over the week
    Index Price on July 14 (Rs) Price on July 21 (Rs) % CHANGE
    BSE Small-cap 5,291 4,815 -9.0%
    BSE Mid-cap 4,354 4,031 -7.4%
    BSE METAL 8,309 7,593 -8.6%
    BSE HEALTHCARE 3,118 3,055 -2.0%
    BSE PSU 4,914 4,609 -6.2%
    BSE IT 3,935 3,745 -4.8%
    BSE AUTO 4,540 4,189 -7.7%
    BSE OIL&GAS 5,270 4,860 -7.8%
    BSE BANKEX 4,264 4,186 -1.8%
    BSE FMCG 1,965 1,850 -5.8%

    The last week was also witness to some leading corporates announcing their first quarter ended June 2006 results. A.C.C, Dabur, IPCL, Gujarat Ambuja, MRPL, Ranbaxy, NDTV and many more surprised the stock market. Ranbaxy, the largest pharmaceutical company in India, showed strong performances in the overseas markets. The company reported a 4% YoY growth in revenues in the domestic market. It must be noted that growth in 2QCY06 was subdued since 2QCY05 had exceptionally high sales, which was due to re-stocking by retailers, post implementation of VAT from April 1, 2005. Ranbaxy retained its third position in the domestic pharma market, capturing a share of 5%. The chronic therapy portfolio (23% of sales) clocked an impressive 42% YoY growth as against the market growth of 20% contributing to the growth from this region. Beside this, NDTV and Raymond announced mixed results.

    Top gainers during the week (BSE-A)
    COMPANY Price on July 14 (Rs) Price on July 21 (Rs) % CHANGE 52-WEEK H/L (Rs)
    BSE-SENSEX 10,678 10,086 -5.5% 12,671 / 7,273
    S&P CNX NIFTY 3,123 2,945 -5.7% 3,774 / 2,221
    EXIDE INDUSTRIES 244 261 7.2% 315 / 177
    SYNDICATE BANK 49 52 6.4% 400 / 165
    KOTAK BANK 246 261 6.2% 559 / 317
    RANBAXY 335 354 5.6% 4,051 / 2,025
    MRF LTD 2,509 2,603 3.7% 115 / 57

    Having looked the institutional activity and select corporate result announcements in the last one-week, let us consider some sector/stock specific developments:

    • Tata Coffee, a subsidiary of Tata Tea, plans to raise around Rs 2.5 bn through partly convertible debentures. The company is raising the funds to fund its recent acquisition of the US-based, Eight 0'Clock Coffee Company for US$ 220 m and also for other capex plans like freeze-dried plant at Theni (Tamil Nadu) and a coffee-processing unit in Uganda. The coffee major proposes to issue partly convertible debentures (PCDs) in the ratio of 1 debenture for every 2 equity shares held as on the record date. Each debenture will have a face value of Rs 400 and will comprise of two parts. Part A of Rs 250 will be converted into one fully paid equity share of Rs 10 on allotment. Part B of Rs 150 will be non-convertible and will be redeemed in equal installments of Rs 50 each at the end of fourth year, fifth year and sixth years from the date of allotment. The non-convertible portion will carry a coupon rate of 7% per annum. The stock closed 0.2% lower week-on-week. Other FOOD Stocks.

    • Tata Motors (Telco), the market leader in the commercial vehicle segment, is planning to introduce a new Tatamobile in FY07. It will be based on a new platform with CRDi engine technology as a possible option in the pipeline. The Tatamobile is a pick-up vehicle forming part of the light commercial vehicle range. With this, the company is further planning to go for various expansion plans in its different segments, leading to an increase in their product range. The stock closed 9% lower week-on-week. Other Auto Stocks.

      Top losers during the week (BSE-A)
      COMPANY Price on July 14 (Rs) Price on July 21 (Rs) % CHANGE 52-WEEK H/L (Rs)
      D-LINK INDIA 90 72 -20.4% 185 / 64
      GEOMETRIC SOFT 99 80 -19.2% 135 / 73
      STERLITE IND 427 352 -17.5% 614 / 128
      GTL LIMITED 148 123 -16.7% 181 / 95
      HIND ZINC 610 510 -16.5% 1,119 / 154

    • Tata Steel has lost the race to acquire a 79% stake in the South African company, Highveld Steel & Vanadium. The stake has been acquired by Russian metals player Evraz and Swiss Bank Credit Suisse. Highveld is one of the largest producers of vanadium in the world. Though Tata Steel was not interested in the vanadium business, the company had reportedly put in a conditional bid for acquiring only its steel business (40% of Highveld's revenues). That said, Tata Steel has chalked out plans to set up a greenfield ferro chrome project involving an investment of US$ 120 m at Richards Bay, South Africa. The company is partnering with Tata Africa (the Tata Group's holding company in South Africa) in the ratio 90:10 for the project. The stock closed 5% lower week-on-week. Other Steel Stocks.

    The Reserve Bank of India (RBI) is expected to announce its first quarter review of the Monetary Policy 2007-07 on Tuesday (July 25th). While many expect the RBI to increase interest rates, as per the latest issue, CMIE (a economic research company) does not foresee a need to increase interest rates. To quote "We believe that there is no need for hike in interest rates in the near future as any hike in interest rate would not help curb inflation but adversely affected the economic growth". In our view, we expect interest rates to increase (whether now or in the next policy meeting is anybody's guess) during the course of the fiscal year. As per banks, while deposit growth has been slower, credit growth has been robust, which puts pressure on the liquidity scenario. Over to the RBI!



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