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Cruising for a bruising?

Jul 23, 2005

Indian stockmarkets continued to defy gravity as the Sensex scaled new heights for the 12th consecutive week having gained 19% in this period. Though the Nifty may not have had the honour to claim this sort of an uninterrupted run, it nonetheless gained 18% during the last 12 weeks. These gains include the over 2% gains witnessed this week, as investors continue to fancy Indian equities. The CNX mid-Cap Index gained over 4%. Notably, these gains have caught the attention of our Finance Minister (FM) too this week.Coming to the weekly action on the bourses this week, the sharp pullback witnessed on the bourses in the latter half of Friday's trading session, seemingly set the stage for a strong opening on Monday. Indian stockmarkets opened with a bang and proceeded to trade higher throughout the day. There was not much selling pressure witnessed during the day, as existing investors preferred to hold on to their investments while the new money took the Indian stockmarkets into a higher orbit. All the major indices i.e. BSE Sensex, NSE Nifty and the CNX Mid-cap Index not only breached their previous all-time highs to record new lifetime highs, but they also closed at new highs on Monday. However, post that, the markets went into a consolidation mode for the next 3 trading sessions, as the index movements remained restricted in a strict narrow range.

However, Friday was a different ball game all together. After trading rather tepid, albeit in the positive territory, in the first half of the trading session, the markets took off in a hurry with strong buying frenzy taking control of the markets. Investors lapped up stocks as if there was no tomorrow. This helped the indices to, once again, break records as the indices cruised past their previous lifetime highs with much ease, making it 12 straight weeks of gains for the Sensex! Strong liquidity, particularly on the international front, has been the pump primer of this rally. Investors must note that with this weeks gains, the Sensex has outdone its previous best of 11 consecutive weeks of gains, which was achieved earlier only on two occasions in the last decade (since 1996) – in early 1998 and late 2001!

FIIs continue to pour in the big moolah with they being net buyers to the tune of Rs 14 bn in the first 4 trading sessions of the week. However, as can be seen in the chart above, it is the revival of the domestic mutual fund flows that has caught our eye. Domestic MFs, which have been sellers for almost the whole of June 2005 and the first half of July 2005, turned net buyers in the current week, as is evident from the Rs 2 bn of net inflows in the first 4 trading sessions of the week, after almost 7 weeks of profit booking.

Top gainers over the week (NSE-50)
CompanyPrice on
July 15 (Rs)
Price on
July 22 (Rs)
%
Change
52-Week
H/L (Rs)
BSE-SENSEX 7,272 7,423 2.1% 7,430 / 5,021
S&P CNX NIFTY 2,213 2,266 2.4% 2,269 / 1,574
BHEL 890 992 11.5% 999 / 513
SATYAM 481 533 10.8% 540 / 320
VSNL 341 374 9.5% 399 / 157
DABUR 141 150 6.6% 162 / 65
TISCO 355 379 6.6% 447 / 238

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

  • Steel stocks witnessed a strong trend this week, helping the BSE Metals Index notch gains of over 4% during the week. While expectations of steel prices having bottomed out and indications of the steel inventory, which was built-up in 1HFY06, correcting to more reasonable levels seems to have provided enough a reason to investors to buy into steel stocks, we believe that this could be only a temporary phenomenon.

  • Nonetheless, Tisco was amongst the biggest gainers amongst index stocks this week, up nearly 7%. It has signed an agreement with AMCI Australia in a bid to buy 5% interest in Carborough Downs Coal Project in Queensland, Australia. Around 58 million tonne (MT) of raw coal is likely to be produced during the estimated 14-year project life. It must be noted that Tisco has undertaken several expansion initiatives, in line with its vision to increase its steel making capacity to 15 MT by 2010 from the current 5 MT. Also, coal prices have witnessed a spurt to US$ 125 per tonne from US$ 60 per tonne in the previous year. Therefore, this is a positive step taken by the company to secure coal requirements for its expansion plans.

  • BHEL was the top gainer amongst the Nifty stocks this week (up 12%). While there was no apparent reason for the strong gains, the company is in talks with leading Japanese transportation companies to manufacture high-speed freight locomotives and rail cars in India. For this purpose, the engineering major is also exploring the possibility of setting up a fresh greenfield capacity project. The project will cater to the requirements of the proposed Rs 200 bn high-speed rail corridor project between Delhi-Mumbai, Mumbai-Kolkata and Kolkata-Delhi. Given the government's thrust on infrastructure and building a better transportation network, this kind of project could give a strong impetus to BHEL's revenues, going forward. Other engineering stocks

  • Gains in Satyam (up 11%) were seemingly owing to the fact that it’s results were better than the top players in the sector. Topline for 1QFY06 witnessed a strong sequential growth driven by an increase in volumes billed. Billing rates also improved marginally. However, the salary revisions adversely impacted margins. The lower margins, along with a reduction in other income, with a considerably higher tax burden led to an 8% sequential decline in the bottomline. Further, the management has raised its revenues and profit guidance upwards for FY06, thus providing the push to the stock. Other software stocks

Top losers over the week (NSE-50)
CompanyPrice on
July 15 (Rs)
Price on
July 22 (Rs)
%
Change
52-Week
H/L (Rs)
ITC 1,768 1,644 -7.0% 1,794 / 980
HERO HONDA 628 617 -1.9% 658 / 412
BAJAJ AUTO 1,390 1,376 -1.0% 1,430 / 795
SHIP. CORP. 148 147 -0.8% 188 / 111
ABB 1,497 1,486 -0.7% 1,549 / 650

The record-breaking run of the indices caught the FMs attention this week as he commented on the relentless rise in the stockmarkets. On the one hand while he indicated that the current market levels are reflecting the true potential of the Indian economy and that (as per his knowledge) all the market players were behaving responsibly, at the same time, he said that investors should not show undue exuberance. He also stated that the Indian economy is slated to do better and that there is enough liquidity in the market, seemingly indicating to the continuance of a soft interest rate regime.

Going forward, while all eyes would be on the monetary policy due on the 26th of July 2005, wherein speculations are already ripe about the reverse repo rates being hiked by 25 basis points to 5.25%, much is awaited from the central bank's review of the monetary policy. Further, while the impact of last month’s fuel price hikes would start to reflect on inflation, the government has already indicated that it may review a further hike in petrol and diesel prices to prevent an adverse impact on the bottomline of oil companies. While rising oil prices and strengthening domestic interest rates remain our key causes of concern on the domestic front, rising US interest rates, which could see FIIs pull out money from emerging markets, need to be watched closely on the international front. Nonetheless, while we continue to have faith in the India story over the long-term, the current valuations do not leave much room for performance error by India Inc., which, if fails to meet 'expectations' could turn the stockmarket tide against the investors. Happy and safe investing!


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