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Flood on the streets!

Jul 30, 2005

While rains lashed Mumbai streets, money poured on Dalal Street. While it surprised many how much it rained in Mumbai (and Maharashtra, of course), similarly it has surprised many how much money has flown into Indian equities. While records were broken in Mumbai with respect to the quantum of rains, similarly records are being broken (almost every day now) on Dalal Street in terms of the FII inflows and Sensex levels. However, while the Mumbai rains pushed sentiments down the drain, the market mood was as euphoric as ever on the back of unabated FII inflows, as the rains were seemingly welcomed with open arms. Marking the 13th week of gains, the Sensex gained almost 3% this week. The Nifty also closed higher by 2%.The bulls refused to take a break on the bourses this week also, as they continued to power ahead with all their might. While there has been no such development that would warrant the steep rise in the markets, it is sheer liquidity that has been the driving force. The current week saw the markets rise on each of the 4 trading sessions, Thursday being a holiday on account of the mayhem caused by the incessant Mumbai rains. However, rain or sunshine, nothing seems to be stopping the ‘Japanese’ bulls from taking a breather as they (reportedly) continue to pour money into Indian equities, pushing valuations of many stocks, across sectors, to such valuations that even the best of financial performance would not be able to justify the valuations being enjoyed by them currently.

FIIs, who have supported the Indian markets almost single handedly, have pumped in US$ 6.4 bn in 2005 to date (almost 75% of total 2004 investment), US$ 1.8 bn of which has come in the month of July alone after a strong June (net investment of US$ 1.2 bn). Further, since the last couple of weeks, even domestic mutual funds have jumped onto the bandwagon, as they became net buyers of Indian equities after a considerable gap of almost 8 weeks.

Top gainers over the week (NSE-50)
COMPANY Price on July 22 (Rs)Price on July 29 (Rs)% CHANGE52-WEEK H/L (Rs)
BSE-SENSEX 7,423 7,635 2.9% 7,709 / 5,022
S&P CNX NIFTY 2,266 2,312 2.1% 2,333 / 1,574
ICICI BANK 455 534 17.5% 555 / 257
VSNL 374 418 11.7% 445 / 157
SBI 721 800 11.0% 809 / 415
ZEE TELE 172 189 10.3% 200 / 128
M&M 620 681 9.9% 785 / 406

As far as the sector/stock specific activity on the bourses was concerned, most of it could be attributed to the first quarter corporate results. However, there were a few that reacted to some other news that would have some impact on their current/future financial performance. Let us look at some of the latter:

The RBI maintained its stance in its first quarterly review of monetary policy FY06. In contravention to expectations, the apex bank did not make any changes in the benchmark interest rates. Although the bank acknowledged the presence of global uncertainties (including hardening of crude oil prices), it reckoned that the domestic factors are indicative of a stable growth in the economy. The RBI also cautioned that though the overall industrial growth had maintained a healthy uptrend, the delayed monsoon had imparted some uncertainties to the likely level of agricultural production. The non-food credit growth on the other hand has been significantly buoyant (5.4% YoY during 1QFY06 against 3.8% in 1QFY05) and is getting broad-based. However, since the upswing continues to be driven by housing and real estate, the apex bank emphasised on the need to ensure credit quality. With the concerns over margin pressures being doused, most banking stocks were in the reckoning this week.

VSNL was among the top gainers this week. The stock closed the week with gains of nearly 12%, hitting its 52-week high in the process. This was mainly on reports that the international long-distance major is acquiring Teleglobe, a provider of voice data, IP and mobile signaling services. As consideration towards the acquisition, VSNL will pay the latter's shareholders a sum of US$ 239 m, which includes assumption of debt and payment of US$ 4.5 per share. Through this acquisition of Teleglobe, VSNL will have ownership interests in more than 80 sub-sea and terrestrial cables. The company would also access more than 200 direct and bilateral agreements with leading voice carriers. This is a positive step taken by the company as it is vying to become a leading global player in wholesale voice, bandwidth and enterprise data services.

Zee was the other big gainer amongst index stocks this week. The stock closed with gains of 10% and made new 52-week highs in the process. The stock has been in the limelight ever since its 4QFY05 results were announced, wherein the company managed a decent performance and this momentum was maintained in 1QFY06. Further, the company had reported a sharp improvement in revenues from advertisements and had expressed optimism that the ad revenue growth this year could be in the region of 20% to 25%, which again was largely maintained in 1QFY06. Further, with increasing DTH penetration, heightened marketing and promotional efforts and an image makeover in recent times has all worked well for the stock.

Top losers over the week (NSE-50)
COMPANY Price on July 22 (Rs)Price on July 29 (Rs)% CHANGE52-WEEK H/L (Rs)
RANBAXY 520 469 -9.7% 640 / 435
COLGATE 240 225 -6.1% 257 / 132
REL. ENERGY 646 607 -6.0% 707 / 436
TATA CHEM 192 181 -5.7% 203 / 115
DABUR 150 145 -3.3% 162 / 65

While the ONGC stock ended with marginal gains, it does not depict the true picture for the stock during the week. Friday saw a large sell-off in the ONGC stock (down 4%) on the back of the massive fire at Bombay High on Wednesday that would seemingly affect the company's production considerably. As per reports, the company's bottomline loss is estimated at about Rs 35 bn and this soured sentiments towards the stock. Other energy stocks

This huge rally witnessed on the streets has now stretched to a record 13 successive weeks of gains for the Sensex. While this may not seem dizzying to the bulls, it definitely makes us nervous, particularly about how long this rally can actually ‘sustain’. In fact, one sure shot sign that retail investors’ money could be at risk is that, domestic mutual funds, which were bearish on the markets at around the 6,500 to 6,800 levels and were net sellers during those weeks, have actually turned bullish at 7,500-plus, becoming net buyers! It is at such times that investors need to keep control over their emotions and not get carried away by the ‘herd mentality’. At the risk of sounding repetitive, an investor must stick to the basic principles of investing, more now than ever before. Take a bottom-up approach to investing, invest in a ‘business’, not just a ‘stock’ and invest as though in partnership with the company for the long term. Happy investing!

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