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Another record week

Aug 13, 2005

Despite being a record week for the Indian stock markets, the Indian indices ended at almost the same levels as that of last week. Both the BSE-Sensex and the NSE-Nifty closed marginally above last Friday's levels. However, the CNX Mid-cap Index performed relatively better with about 1.5% gains. While the indices remained largely unchanged, it was the second consecutive week of immense volatility on the bourses, which, unlike the previous many weeks, surely must have kept every investor guessing about the markets' next directional move. Also, the FII behaviour this week was not very encouraging. Last week's Friday's jitters (Sensex down 43 points) spilled over to this week also with the Indian stockmarkets opening on a shaky note on Monday and proceeding to trade lower throughout the day. In fact, the indices witnessed one of the severest of falls in recent times with the Sensex and the Nifty correcting by nearly 2% each. This was followed by another very volatile trading session on Tuesday with the markets finally ending the day amidst marginal losses. However, it must be noted that in the three trading sessions (Friday to Tuesday), Foreign Institutional Investors (FIIs) remained net buyers of equities. The weakness was primarily a factor of selling by our domestic mutual funds (MFs).

However, Wednesday and Thursday were two days of a different ball game altogether. The bulls came back with a vengeance in these two trading sessions and took the benchmark indices higher by nearly 3%, thus recouping the previous three days' losses (including Friday). In the process, the Nifty and the CNX Mid-cap Index achieved new lifetime highs. However, the bulls this time were from the domestic mutual funds' camp as the, as yet, pump primers of this rally (read FIIs) took a backseat.

FIIs who have, in 2005 (to date), invested nearly US$ 7.3 bn in Indian equities, opted to take some profits off the table. They were net sellers to the tune of Rs 1 bn on Wednesday when the Sensex gained a whopping 134 points (biggest gain in over 5 months) and again were marginal net sellers the following day, when the Sensex rose another 87 points. It must be noted that this selling by FIIs has come after 52 straight sessions of net buying (US$ 4.3 bn in this period). On Friday, things again took a turn for the worse, with the markets losing ground. This volatile movement of the indices during the week indicates apprehension and lack of investor confidence at the current high index levels. However, buying at lower levels capped the downfall in the markets.

Now let us consider some key sector/stock specific developments this week:

  • Largely in line with expectations, the Federal Open Market Committee hiked Fed rates by quarter percentage (to 3.5%) for the 10th consecutive time since June 2004. Although the apex body kept the language 'measured', it acknowledged the strength of the economy and the impact of higher energy prices.

  • Infrastructure Development Finance Company Ltd (IDFC) made its debut on the bourses on Friday and closed at a 104% premium to its offer price of Rs 34 per share. It must be noted that IDFC had financed 25% of the total infrastructure outlay in the country in FY05. Its expertise in the infrastructure sector and strong relationships with government and infrastructure sponsors provide it with a platform for facilitating private investment and public-private partnerships. However, at the current price, the stock is quoting at a price to book value of 3.6 times its FY05 numbers. Other investment and finance stocks

    Top gainers over the week (NSE-50)
    CompanyPrice on
    Aug 5 (Rs)
    Price on
    Aug 12 (Rs)
    H/L (Rs)
    BSE-SENSEX 7,754 7,767 0.2% 7,861 / 5,022
    S&P CNX NIFTY 2,361 2,361 0.0% 2,390 / 1,574
    HERO HONDA615 693 12.7% 702 / 412
    TATA TEA717 789 10.1% 822 / 381
    GRASIM1,241 1,316 6.0% 1,404 / 1,000
    BHARTI TELE294 311 5.8% 314 / 131
    RANBAXY508 536 5.6% 640 / 435

  • FMCG major, Tata Tea, was amongst the biggest Nifty gainers this week. This world's second largest branded tea company is looking for an overseas acquisition to the tune of US$ 1 bn. The tea major is looking at a brand or a company or both, with strong presence in US or Latin America. It is looking for brands, which have a strong presence in the ready-to-drink teas in the US and the target is a mid-sized company. This move by the company is in line with its strategy to enhance its market share in USA, where there is huge growth potential as currently it has negligible brand visibility in that country. Other FMCG stocks

  • Gains in Bharti Tele this week were seemingly aided by the news that the company has raked in a 61% YoY growth in its GSM mobile subscriber base in the month of July 2005 taking the total to 12.8 m. Notably, during this period, the Indian GSM market has grown by 53% YoY. As a result of this outperformance, Bharti's market share has increased from 26.2% in July 2004 to 27.4% in July 2005. Such staggering growth figures from Bharti have been a result of the company's increased presence across India. Also, focus on its core competencies of marketing and branding telecom services through outsourcing non-core functions like network creation and maintenance, has stood the company in good stead. Other telecom stocks

    Top losers over the week (NSE-50)
    CompanyPrice on
    Aug 5 (Rs)
    Price on
    Aug 12 (Rs)
    H/L (Rs)
    VSNL433 403 -6.9% 445 / 157
    REL. ENERGY647 609 -5.9% 707 / 436
    BAJAJ AUTO1,479 1,393 -5.8% 1,548 / 850
    IPCL194 184 -5.4% 221 / 156
    MARUTI502 476 -5.1% 512 / 338

  • As per figures released by the Society of Indian Automobile Manufacturers (SIAM), passenger car volume sales were down by as much as 11% YoY in July 2005, owing to flood like situations in the states of Gujarat and Maharashtra during the month. Two-wheeler sales also dipped 3% YoY. However, this was primarily due to a fall in scooter sales by as much as 35%, while motorcycle sales actually grew by 6%. This reflects a clear shift in preference towards motorcycles, as scooters have been steadily losing market share. Going forward, given a higher base and adverse effect of high crude prices and an increasing interest rate regime, major carmakers, like Tata Motors, have indicated some slowdown in sales this year as compared to FY05. Other auto stocks

To conclude, as far as the 'critical' FII behaviour this week was concerned, the bulls would want to take solace by convincing themselves that this action by the 'men with the money' was just an act of profit booking considering that the Sensex has gained almost 24% in a single breath (since May 2005). Moreover, for the week they were net buyers to the tune of Rs 4 bn. On the other hand, the bears, who have been praying all along for a correction and haven't had a single (significant) occasion to celebrate, would want to consider this as a sign of a 'seemingly' temporary reversal.

As far as we are concerned, while we would be better off leaving the judgment game of predicting index levels to those who claim to have the crystal ball to do so, we would rather stick to understanding companies and their fundamentals. This is because, while history has proven that FIIs have largely been 'fair weather friends', we believe that if the fundamentals of a company are strong, it would continue to deliver performance and attract investors, irrespective of the weather. Happy Investing!

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