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The month gone by

Aug 5, 2004

The month of July remained a rather eventful one as the new finance minister presented his government's maiden union budget, which markets were waiting since a long time in order to get some direction about the government's stand on the reform process. From a broader economy perspective, the continuation of thrust in infrastructure development and addressing fundamental issues like poverty, education and healthcare have been some big positives emanating from the budget. By hiking the FDI limits in sectors like telecom, civil aviation and insurance, the FM indicated the UPA government's openness to foreign capital (again in line with the CMP) and allayed certain fears that had crept in, courtesy the alignment with the Left. Besides, this was also the month when most of the top league companies of India Inc came out with their 1QFY05 numbers. Hence, in the backdrop of such important events, let us have a look at some stocks that were amongst the top gainers over the last month.

BSE Sensex 4,870 5,160 6.0%
Tata Steel 304 398 30.9%
ITC 909 1,038 14.2%
ZEE Tele 124 140 12.9%
Reliance 434 487 12.2%
Tata Power 236 264 11.9%

While Sensex gained around 6% in July, steel major, Tisco gained around 31% on the bourses and emerged as the top gainer. These strong gains were mainly on the back of strengthening steel demand from western countries apart from China. Also, the company posted superb results for the first quarter, with topline growing by more than 40% and bottomline 179% YoY for the first quarter. Almost the entire gains in the topline were a factor of significantly improved realisations, which were partly due to general rise in prices and also due to better contribution from high margin product sales i.e. value-added products. Tisco has constantly been making efforts at improving its product mix since the last few quarters with higher focus on branded product sales. On account of its initiatives in moving towards high value added products, operating margins improved by 1,450 basis points in 1QFY05.

Zee Tele stock, on the other hand, witnessed a 13% rise over the last one month, mainly on account of the fact that the company has initiated a major restructuring of international operations with the aim of garnering substantial tax efficiencies and reduction in operation costs. It is also planning to launch new channels for the Indian market along with increasing regional presence through its channels under the Alpha brand. However, clarity is still awaited on the CAS front. As far as first quarter results are concerned, the topline of the company grew by 11% and bottomline up 18% YoY during the quarter.

ITC, the cigarette major, gained 14% on the bourses on the back of two main factors. First, against market expectations, the FM didn't introduce any hike in the excise duty of the cigarettes. The fact that cigarettes contribute around 80% to the company's topline and around 90% at the PBIT levels, any adverse hike in this excise duty can have a substantial impact on the company's earnings. During the first quarter, the company posted good results with topline growing by 17% and bottomline up 16%. The company's paperboard and hotel businesses continued to clock good growth.

Gains in Reliance can be viewed in light of upward revision in its petro chemical prices and good quarterly results. The largest private player in the power sector, Tata Power gained by around 12% in the last one month. Over pessimism towards the power sector (government decided to review Electricity Act) was one of the reason for the stock to fall significantly in the recent past. The company plans to add 1,500 MW of generating capacity over the next five years. This amounts to an expansion of about 70% to its current capacity. This includes the 120 MW plant at Jojobera and the 330 MW hydropower project in Uttaranchal and two 500 MW power plants each at Vile in Maharashtra.

Though markets will always find one or the other reason to wait and watch - two months back it was elections, a month back its budget and a week back it was monsoons - we believe one should take advantage of the attractive valuations of the Indian equity markets (Sensex is trading at 12.7 times trailing 12 months earnings). Also, one needs to have a long-term (2 to 3 years) investment perspective and should invest in a staggered manner in companies with strong fundamentals and competent management.

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