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Banks and FM! - Views on News from Equitymaster
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  • Aug 5, 2006

    Banks and FM!

    July 2006 was a month of resurgence for the Indian stock markets. The Sensex bounced back from its lows post the sharp correction to close at 10,743 by the end of July 2006, a gain of 7.4% from its lows. Global indices also staged a come back with the Dow touching 11,200 by the end of July 2006, a gain of 4.4% from lows. The momentum sustained in the first week of August as well. Apart from commendable show by India Inc. in the most recent quarter, the decline in crude prices also brought some relief to investors.

    Taking cues from the global markets, the BSE-Sensex and NSE-Nifty opened on a firm note at the start of the week. Despite selling pressure during the course of the week, advances outnumbered declines and the BSE Sensex crossed the 11,000-mark for the first time in over four months on Thursday. Earlier, the Sensex had crossed 11,000-mark for the first time in March 2006.

    At the broader economic level, as per the official numbers declared yesterday, the wholesale price index (WPI) rose to 4.67% in the 12 months to July 22, higher than 4.52 % a week earlier, due to an increase in some food, energy and manufactured product prices.

    Coming back to the stock markets, as far as the institutional activity on the bourses is concerned, as compared to the last week, FIIs were net buyers this week to the tune of Rs 8 bn. This week, domestic mutual funds were net sellers (Rs 0.7bn).

    Net investments -
    (Rs m) FIIs MFs Total
    27-Jul-06 4,617 2,628 7,245
    28-Jul-06 131 (795) (664)
    31-Jul-06 3,558 (408) 3,150
    1-Aug-06 (463) (1,155) (1,618)
    2-Aug-06 1,040 (1,005) 35
    Total 8,883 (735) 8,148

    The benchmark BSE Sensex was up during the last week by 1.7%. Amongst sectoral indices, the BSE Auto index was up by 3.3%, followed by BSE IT. Both the sector gained on back of strong results. Stocks from FMCG and energy sectors closed in the red. After falling sharply, there seem to be significant interest in mid-cap and small-cap stocks, as they outperformed the benchmark indices.

    Key indices over the week
    Index Price on
    July 28(Rs)
    Price on
    Aug 04(Rs)
    BSE Small-cap 5,065 5,217 3.0%
    BSE Mid-cap 4,278 4,359 1.9%
    BSE METAL 7,803 7,844 0.5%
    BSE HEALTHCARE 3,214 3,269 1.7%
    BSE PSU 5,010 5,081 1.4%
    BSE IT 3,896 4,019 3.1%
    BSE AUTO 4,420 4,565 3.3%
    BSE OIL&GAS 5,054 4,999 -1.1%
    BSE BANKEX 4,720 4,773 1.1%
    BSE FMCG 1,893 1,857 -1.9%

    The last week was also witness to some leading corporates announcing their first quarter ended June 2006 results, which include IOC, IVRCL, NIIT, Welspun India, Britannia. Indian Oil, the country's largest oil refining and marketing company, registered a topline growth of 26% YoY, while the operating margins turned negative. The dismal operating performance can be attributed to its inability to pass on the rise in crude oil prices to consumers. Interest expenditure almost doubled during the quarter. However, it was the capital gain on the sale of a stake in ONGC that helped the company to post profits in the first quarter.

    The Indian biscuit major, Britannia announced mixed results. The company reported a topline growth of 19% (YoY). However, on the back of substantially higher raw material and other costs, operating profits declined by nearly 44% YoY. Consequently, operating margins have witnessed a sharp contraction. The effect has been seen in the bottomline, which declined by 23% YoY. But for higher other income and lower tax expenses, the net profit decline would have been higher.

    Top gainers during the week (BSE-A)
    Company Price on
    July 28(Rs)
    Price on
    Aug 04(Rs)
    H/L (Rs)
    BSE-SENSEX 10,680 10,867 1.7% 12,671 / 7,538
    S&P CNX NIFTY 3,131 3,177 1.5% 3,774 / 2,300
    MRF LTD 2,863 3,238 13.1% 4,051 / 2,025
    INDO RAMA SYN 45 50 11.6% 100 / 43
    CORPN BANK 234 259 10.8% 475 / 205
    BHEL 1,968 2,150 9.3% 2,465 / 1,020
    NICOLAS PIRAMAL 199 218 9.1% 301 / 150

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

    • Indian Oil, the country's largest oil refining and marketing company, is planning to enter the retailing sector for non-fuel products and services. The initiative seems towards derisking revenues from petroleum product sales, which have been severely impacted due to government regulations. The company has indicated that it is open for collaborations with new retailers like Pantaloon and Bharti. The stock was up 0.5% week-on-week. Other Energy stocks.

    • Tata Consultancy Services (TCS) entered into an agreement with Sequenom, a US -based company, to develop software solutions. While the deal size has not been specified, the company has mentioned that it is a multi-million dollar deal. This strengthens TCS' presence in the life sciences segment, which the company has said is an area of high growth and strong focus. While this deal is unlikely to contribute substantially to TCS' topline, it will strengthen its domain focus. The stock closed 2.4% higher week-on-week. Other software stocks.

      Top losers during the week (BSE-A)
      Company Price on
      July 28(Rs)
      Price on
      Aug 04(Rs)
      52-Week H/L
      BHARAT ELEC 1,118 1,005 -10.1% 1,472 / 678
      HLL 242 221 -9.0% 296 / 157
      ORIENTAL BANK 178 163 -8.5% 297 / 139
      FACT 24 22 -8.0% 40 / 19

    • Exploration and production major, ONGC, is building a new platform at Bombay high at a cost of Rs 9.4 bn. The company hopes to start production from the given platform post- monsoon of 2008. The earlier platform was destroyed due to a fire at Bombay High. Once the new platform is in place, ONGC will be able to produce 300,000 barrels of oil per day (BOPD). Prior to the accident, the platform was producing 261,000 BOPD, which came down drastically to 142,000 BOPD after the accident. Meanwhile, ONGC has targeted crude oil production of 27.4 MMT during the current fiscal as against 24.4 MMT recorded last year. The company has also earmarked Rs 50 bn towards development drilling and capital projects during fiscal 2007. The stock closed flat week-on-week. Other Energy stocks.

    The fact that there is an upward bias in interest rates seems to be worrying the Finance Minister a lot. Reportedly, in a written letter to the CEOs of public sector banking undertakings, he has shared his concerns with respect to the hike in lending rates by the PSU banks and its consequent impact on economic growth. This, in our view, is completely unwarranted and the Finance Minister (or for that matter the ruling government) has no business in interfering with the day-to-day operations of PSU banks. Interest rates are a function of economic cycles. Period.

    Justifying the move by claiming that the government is a majority shareholder in PSU banks raises apprehensions over the future of the banking sector in India. After making sure that all the PSU oil companies are into deep losses, it is the turn of the PSU banks now! We remain concerned about the lack of vision with the ruling government, which in fact is likely to have significant impact on the long-term growth potential of the economy. We reiterate our view that “the business of government is government”.

    Now that the results season has come to an end, stock markets will start focusing on global factors, which include the developments in West Asia and its impact on crude prices. The coming week will also throw light on the stance of the US Federal Reserve on interest rates and economic outlook. We continue to believe that interest rates in India will go up further over the course of the fiscal year 2006. In this backdrop, we suggest investors to practice caution while selecting sectors/stocks for the long-term.

    Happy investing!



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