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Inflation deflates sentiments - Views on News from Equitymaster
 
 
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  • Aug 14, 2004

    Inflation deflates sentiments

    The Indian stock markets remained surrounded by concerns throughout the week, which was reflected in this weeks trading. Investors not only refrained from committing themselves to equities but also opted to take some money off the table, which led to the benchmark indices ending the week with losses of about 2% each. This put an end to the 6-week gaining streak on the bourses (see chart below).

    Note: For the week ended August 13, 2004, FII data does not include Friday's activity

    Shrugging off last week's negative surprise on the inflation front, the Indian indices opened on a positive note this week. Though apprehensive, the indices managed to gain ground on the first two trading days of the week. However, Wednesday's trade was a different ball game altogether. Markets tumbled sharply on Wednesday owing to the CMIE forecast, which lowered its India GDP growth estimates for FY05 from 6.3% to 6%. This estimate was arrived at on the back of the uneven pattern of rainfall being witnessed during the current monsoon season, which, according to the organisation, is likely to adversely affect the farm output, thus putting strain on India's growth prospects.

    The following two days also saw the indices drift lower. Apprehensions with respect to high inflation and its impact on interest rates have forced investors to take a cautious approach towards Indian equities. While a staggered and calculated hike in interest rates by the government should not 'derail' India's growth prospects, it certainly has the potential to slow down the growth rate, as corporate profitability would be affected. Further, higher interest rates would also put pressure on the government as it would be much more difficult for it to stick to its fiscal deficit targets considering its huge borrowing programme for its various infrastructure projects.

    Key gainers over the week (NSE-50)
    COMPANY Price on
    August 6 (Rs)
    Price on
    August 13 (Rs)
    %
    CHANGE
    52-WEEK
    H/L (Rs)
    BSE-SENSEX 5,197 5,103 -1.8% 6,250 / 3,874
    S&P CNX NIFTY 1,633 1,598 -2.2% 2,015 / 1,229
    SUN PHARMA 352 376 7.0% 420 / 204
    IPCL 181 191 5.5% 240 / 106
    HINDALCO 1,054 1,098 4.2% 1,599 / 720
    ACC 257 263 2.1% 308 / 179
    RANBAXY 943 959 1.7% 1,171 / 828

    However, amidst all the negative near-term cues for the stock markets, not just in India, but also across the globe, stock specific action continued on the bourses.

    • Hindalco was amongst the top gainers amongst the index stocks this week (see table above). With aluminium prices holding firm ground, copper realisations set to improve and capacity expansions completed, the company is well poised to reap the advantages of the current upturn in the commodity cycle. This is also vindicated by the performance of the stock over the last 3 months wherein the stock has gained about 15% compared to the approximate 5% fall in the Sensex.

    • Cement stocks, continued their run on the bourses. With cement prices remaining firm aided by the exports demand (up 10%) led by the Gulf countries, which is sucking out excess capacity mostly in western and northern region, cement companies' realisations are expected to remain strong. Further, with robust demand from housing (largest cement consumer) and domestic infrastructure projects set to continue and no greenfield capacity expansion in sight, the demand-supply scenario favours cement companies.

      Key losers over the week (NSE-50)
      COMPANY Price on
      August 6 (Rs)
      Price on
      August 13 (Rs)
      %
      CHANGE
      52-WEEK
      H/L (Rs)
      BPCL 345 322 -6.6% 533 / 230
      SAIL 41 38 -6.4% 62 / 21
      TATA MOTORS 425 401 -5.8% 570 / 242
      DABUR 70 67 -5.5% 98 / 53
      VSNL 172 163 -5.4% 210 / 109


    • Energy stocks were out of favour this week with BPCL losing as much as 7% this week. High international crude prices, hovering near US$ 46 per barrel, have led to concerns over the petro-product marketing companies being able to pass on the increase to consumers. Although the government has provided limited autonomy to them to increase prices of petrol and diesel with a 10% price band, the reduction in subsidies share of the government has not helped matters. As a result, the oil marketing companies shall witness pressure on the bottomline during the fiscal.

    • Steel stocks witnessed significant correction during the week, as investors seemed to have seemingly drawn inferences from the Finance Minister's (FM) statement who partially blamed the rising commodity prices in the domestic markets for fuelling the inflation. This seems to have given negative cues to investors about the possibility of a (forced) price reduction or price freeze at a time when international steel prices are trading at a considerable premium to domestic steel prices.

    Going forward over the next few weeks, concerns pertaining to domestic inflation and interest rates would remain at the top of investors' minds, especially considering the fact that the recent price hikes in steel and petroleum products are yet to be reflected in the weekly inflation numbers, which was at 7.61% for the week ended July 31, 2004. Moreover, with oil companies set to increase petroleum product prices once again, on the back of the record high global crude prices (near US$ 46 per barrel), the inflationary situation for the domestic economy does warrant some concern in the near-term.

    However, we would like to re-iterate that attractive valuations at about 11x FY05 expected earnings makes Indian equities a relatively safer bet for investors. We continue to believe that there are many stock specific stories available in the market at attractive valuations, which could be considered by investors to build their portfolio with a long-term investment horizon.

     

     

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