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Bearing the sub-prime brunt - Views on News from Equitymaster
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  • Aug 11, 2007

    Bearing the sub-prime brunt

    With the sub-prime contagion spreading its tentacles far and wide, the Indian markets too did not remain immune to it and as a result, the benchmark indices continued to edge lower during the week. For the week ended August 10, 2007, both the BSE-Sensex as well as the NSE-Nifty lost nearly 2% each.

    As more and more institutions across US got dragged into the sub prime quagmire, the Indian markets continued to get affected by the weak sentiment. They thus opened the week rather poorly and edged lower on Monday. However, days of profit booking had thrown open an opportunity for some bargain hunting and this propped up the indices for the next couple of days, with Wednesday being the stand out day. Furthermore, with the government stepping in to curb the rising rupee through some new foreign borrowing directives, the tech stocks finally saw some movement and this helped the indices notch up strong gains. The remainder of the week though once again belonged to the 'sub prime' issue as indices lost heavily on the back of the reports that the contagion had spread to other continents, with it being particularly severe in certain parts of Europe.

    On the institutional activity front, between 3rd and 9th August, while Foreign Institutional Investors (FIIs) sold equities worth Rs 5 bn, domestic mutual funds emerged as net buyers to the tune of Rs 7 bn.

    (Rs m) MFs FIIs Total
    3-Aug 2,568 1,928 4,496
    6-Aug 479 (11,666) (11,187)
    7-Aug (52) (1,236) (1,288)
    8-Aug 3,773 1,902 5,675
    9-Aug 453 3,826 4,279
    Total 7,221 (5,246) 1,975

    On the sectoral indices front, barring the IT and the small cap index, all the other indices ended the week in the red, with the metal index being the worst hit as it lost 4%. Government's new directives on foreign borrowings helped prop up the IT stocks and this led to the index gaining nearly 2% during the week.

    Index As on August 3 As on August 10 % Change
    BSE IT 4,704 4,774 1.5%
    BSE SMLCAP 7,892 7,904 0.2%
    BSE OIL AND GAS 7,808 7,756 -0.7%
    BSE HEALTHCARE 3,628 3,601 -0.8%
    BSE AUTO 4,797 4,736 -1.3%
    BSE PSU 7,020 6,919 -1.4%
    BSE MIDCAP 6,605 6,508 -1.5%
    BSE FMCG 1,957 1,903 -2.8%
    BSE BANKEX 8,049 7,774 -3.4%
    BSE METAL 11,325 10,864 -4.1%

    Now let us have a look at some of the key stock/sector specific developments during the week:

    Steel stocks closed mixed for the week as while SAIL edged higher by 1%, Tata Steel edged 3% lower. As per a leading business daily, Tata Steel has entered into a memorandum of understanding (MoU) with Australian mining finance house, Riversdale Mining, to acquire a 35% stake in its Mozambique Coal Project for Rs 3.47 bn. According to the MoU, the two companies would develop the project jointly. The definitive agreement is expected to be finalised and executed by November 30, 2007. The hard coking coal derived from the project would be supplied to the Corus facilities in the UK and Europe and used for the company's enhanced requirement in India. This partnership gives Tata Steel an opportunity to jointly explore part of a large coal basin, which would prove to be a potential source to meet part of the raw material requirement and enhance the long-term competitiveness of the global operations.

    Top gainers during the week (BSE A)
    Company Price on
    Aug 3 (Rs)
    Price on
    Aug 10 (Rs)
    H/L (Rs)
    BSE SENSEX 15,138 14,868 -1.8% 15,869 / 11,052
    S&P CNX NIFTY 4,402 4,333 -1.5% 4,648 / 3,229
    DENA BANK 52 58 9.7% 61 / 25
    POLARIS SOFTWARE 111 121 9.3% 237 / 102
    HCL TECH 298 319 7.1% 366 / 271
    IDBI 109 116 7.0% 126 / 55
    GSK PHARMA 1,146 1,219 6.4% 1,340 / 1,049

    Software major, Wipro has signed a definitive agreement to acquire the Nasdaq-listed Infocrossing for US$ 18.7 per share, pegging the enterprise valuation of the IT infrastructure management services firm at US$ 600 m. This is Wipro's twelfth acquisition in the IT space and the ninth in the past 24 months alone. The entire acquisition process is likely to close by December 2007 and the acquired entity will be merged with Wipro's subsidiary in the US - Wipro Inc. Infocrossing earned revenues of US$ 232 m in 2006 and has 900 employees. Infocrossing has 190 clients with 95% repeat business. However, the operating margins of Infocrossing are in the range of 10% and 14%, which are lower than Wipro's margins of around 25%. However, the management expects to mitigate the margin difference in the next three years due to synergies. The current global IT infrastructure market is estimated to be around US$ 150 bn of which US$ 70 bn is offshore. This acquisition is a perfect fit for Wipro's technology infrastructure services (TOS) and gives it a leadership position in remote infrastructure management services. The stock, along with its peers Infosys closed 2% higher.

    Top losers during the week (BSE A)
    Company Price on
    Aug 3 (Rs)
    Price on
    Aug 10 (Rs)
    H/L (Rs)
    FEDERAL BANK 368 331 -10.0% 375 / 176
    FINOLEX CABLES 87 80 -8.2% 110 / 59
    VSNL 449 414 -7.8% 515 / 342
    JINDAL STEEL 3,989 3,682 -7.7% 4,270 / 1,450
    NOVARTIS 334 310 -7.2% 569 / 306

    Telecom stocks closed the weak lower. Reliance Communications and Bharti both lost 5% and 4% respectively. Reliance Communications, India's second largest mobile player is believed to be in talks with American Tower Corporation for offloading another 21% stake in its telecom towers business for a sum of Rs US$ 1.8 bn atleast. Interestingly, the company has valued the whole unit at Rs 350 bn, 30% more than the Rs 270 bn valuation that was considered when it sold a 5% stake last month to a clutch of institutional investors. Even this level of valuations is not likely to deter potential investors such as ATC as currently, India is among the fastest growing telecom markets with still a long way to go before the penetration saturates. The company currently has around 14,000 towers and plans to add another 23,000 in FY08.

    'Be fearful when others are greedy and greedy when others are fearful'. This is the approach that we would like the investors to take at all times. The quote assumes even more importance in times such as these where a flight of capital is pulling all stocks down, irrespective of the fundamentals. So rather than getting caught in the moment, try looking for good quality stocks available at reasonable valuations, as the India story still remains intact. For sooner or later, you are more likely to be rewarded adequately.



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