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Fundamentals or liquidity? - Views on News from Equitymaster
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  • Aug 6, 2005

    Fundamentals or liquidity?

    Fourteen weeks - that's how old this leg of the rally is! And this is no small feat. As mentioned in earlier articles also, in the last decade, the rally had fizzled out in 12 weeks but this time, the bulls seem to be in a different mood. Including the gains this week i.e. BSE-Sensex (up 1.6%) and NSE-Nifty (up 2.1%), these indices have gained 23% and 22% respectively in the last 14 weeks. Further, mid-caps, which had been overshadowed in recent times by the rally being witnessed in index stocks, shot back into the limelight as the CNX Mid-cap Index gained over 4% this week.

    The strong rally witnessed last week (Sensex up 3%) was welcomed with some kind of apprehension at the start of this week as investors went in the sell mode on Monday and booked some profits in the first half of trade. But, keeping in trend with the recent times, bulls took advantage of this opportunity to create/add to their portfolios. Further, re-affirming their insatiable appetite for Indian stocks, they continued to gobble up stocks on Tuesday as well pushing the indices to higher levels and the Sensex into the 7,800+ orbit.

    However, since then, the bulls seemed to have shown some signs of fatigue as evinced from their ability to take the markets higher. In fact, to look at this the other way round, there has been consistent unloading of stocks at the 7,800 levels as is evident from the fact that for the next three trading sessions (Wednesday through Friday), the indices oscillated within a strict range. Just to put things in perspective, the Sensex was largely restricted within the 7,750 and 7,800 levels in this period. However, it must be noted that Friday witnessed considerable profit booking in the final hour of trade as the indices were pushed lower into the red, thus putting a full stop on the 9-day winning streak of the Sensex in which it had accumulated nearly 500 points!

    While the large-cap indices witnessed alternate bouts of buying and selling giving rise to the intense volatility in the latter half of the trading week, the mid-cap stocks continued to slowly and steadily build on their gains. It must be noted that this week's performance by mid-cap stocks is a comeback of sorts as they have been out of the limelight for sometime now. Or better put, large caps have attracted more of investors (read Foreign Institutional Investors (FIIs)) attention. The CNX Mid-cap Index gained over 4% this week.

    The FII inflows tap remained open throughout the week as they invested another Rs 17 bn (about US$ 400 m) into Indian equities. With this, the total FII investments in 2005 until the end of Thursday's trade was just a whisker away from the US$ 7 bn mark! And probably, this may have already been breached assuming that FIIs remained net buyers during Friday's trade also. Domestic mutual funds (MFs), which are seemingly flush with funds, thanks to the recent spate of IPOs, also continued to lend their support to the rally during the week as they closed with net buys of Rs 3 bn (about US$ 65 m).

    Now let us consider some stock specific news this week.

    • A big news this week was that of Oracle Corporation, a US$ 11.8 bn global leading provider of enterprise software/ERP solutions,buying out Citigroup's 41% equity stake in i-flex solutions, India's premier software products company. As per the Securities and Exchange Board of India (SEBI) takeover code, Oracle will have to make an open offer for 20% more in i-flex. Oracle will pay Rs 800 per share to Citigroup for the 41% stake and will subsequently make an open offer to shareholders at a price of Rs 882.6 per share. This will give i-flex access to a huge base of marquee clients of Oracle. As a matter of fact, 17 of the top 20 banks use Oracle's ERP software. As per both the companies, i-flex will continue to remain a listed company. The i-flex stock gained 12% this week on the back of this news and despite its poor. 1QFY06 results. Other software stocks

      Top gainers over the week (NSE-50)
      Company Price on
      July 29 (Rs)
      Price on
      Aug 5 (Rs)
      H/L (Rs)
      BSE-SENSEX 7,635 7,754 1.6% 7,844 / 5,022
      S&P CNX NIFTY 2,312 2,361 2.1% 2,377 / 1,574
      SAIL 53 60 14.1% 70 / 37
      TATA POWER 393 429 9.1% 432 / 242
      COLGATE 225 244 8.5% 257 / 132
      RANBAXY 469 508 8.3% 640 / 435
      BHEL 1,007 1,086 7.8% 1,155 / 519

    • Public sector engineering major, BHEL, was amongst the largest gainers in index stocks this week, up 8%. Part of the optimism could be attributed to the recently announced 1QFY06 results, wherein the bottomline leapfrogged 444% on the back of a 66% YoY growth in topline and a 500 basis points expansion in operating margins. Apart from this, BHEL bagged a contract for the supply and erection of the Main Plant Package for two separate 500 MW thermal power stations in Andhra Pradesh. The project is valued at over Rs 21 bn and is slated for commissioning in about 39 to 41 months. Other engineering stocks

    • Tata Power gained 9% this week and made it to the gainers list. Much of these gains came about on the back of the news that Tata Power is on the lookout for overseas opportunities and is eyeing South Africa and Bangladesh. In South Africa, the company is planning to set up a 500 MW coal-based plant through a joint venture involving a cost of Rs 20 bn. In Bangladesh, Tata Power has plans to set up a 1,000 MW power plant. It involves US$ 240 m of equity and US$ 570 m of debt. The fact that the company is in the process of shifting its focus from being a Mumbai centric player to having a national and international presence augurs well for its growth in the future.

      Top losers over the week (NSE-50)
      Company Price on
      July 29 (Rs)
      Price on
      Aug 5 (Rs)
      H/L (Rs)
      ZEE TELE 189 174 -8.1% 200 / 128
      ICICI BANK 534 500 -6.4% 555 / 260
      HDFC BANK 699 674 -3.6% 740 / 353
      HDFC 926 906 -2.1% 950 / 532
      WIPRO 736 722 -2.0% 776 / 531

    • As far as the top losers of the Nifty 50 this week were concerned, these were down primarily on the back of profit booking as these stocks had gained significant ground over the last few weeks.

    While we concur with the fact that the fundamentals of India Inc. are strong after having improved considerably over the last couple of years, it is time for investors to start wondering if the recent leg of the rally, especially beyond the 7,000 levels is based on fundamentals, or is it just liquidity. Indian stock markets were not alone to have gained ground over the last few months. Though we may have outperformed many, but we were not the only one. To justify this, we looked at various markets across the globe and the results were not surprising. The gainers during this period (since the Indian stockmarket rally started to date) were Seoul Composite (Korea) up 20%, Mexico (up 17%), Jakarta (Indonesia) stockmarkets up 14%, Nasdaq (US) up 13%, Taiwan Weighted up 11%, FTSE up 11% and Straits Times (Singapore) up 10%. In fact, of the many markets that we looked at, we did not find anyone in the red during this period.

    To conclude, as far as our belief is concerned, we continue to subscribe to the view that the rally witnessed in the past couple of months has been defying fundamentals and, as such, investors need to practice utmost caution. Though there still are stocks that are good investment options for the long-term, investors need to abstain from the herd mentality and not give in to temptations that rising markets like these bring. Happy investing!



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