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Optimism overplayed - Views on News from Equitymaster
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  • Aug 16, 2003

    Optimism overplayed

    To begin with, it was a short week on the bourses, Friday being a holiday on account of Independence Day. However, the markets continued to rally in the current week also. During the week, markets displayed some volatility, as at every rise there was some selling pressure witnessed! However, the final result was that the bulls once again managed to overshadow the bears. And now we feel that the optimism regarding India Inc.’s growth may be just a bit overplayed or rather factored in at current levels. While the Sensex gained 1% over the week, the NSE Nifty was higher by 2%. This discrepancy can be attributed the fact that one of the Nifty constituents, SAIL, showed immense strength as its stock price gained almost 48% in just the last 4 trading sessions.

    Note: March 31, 2003 has been taken as base ‘0’.

    This time, let us begin with a short note on one of the hottest stories on the Indian bourses, Steel. Another reason for discussing this is the fact that the top 2 gainers amongst BSE ‘A’ group stocks this week were steel stocks (see below). Steel has been one of the biggest stories in the Indian capital markets since the last one-year, and moreso in the current fiscal. And this is aptly displayed in the chart above. Let us go through, very briefly, as to what caused this euphoria and how does it look like going forward.

    Steel stocks began their upward journey soon after the September 11, 2001 attacks on the US. Since then, they haven’t looked back. Steel prices continued to strengthen every month backed by strong demand from…primarily China. China, which is growing at 7%-8% YoY has been gobbling up huge amounts of steel in the wake of it hosting the Olympics in 2008. It is spending in a huge way on infrastructure and since it is short of nearly 30 million tonnes of domestic steel, the same is imported, thus improving the world steel demand-supply mismatch. All over the world steel companies have benefited immensely from the China phenomenon. However, going forward, not too ahead in time, when additional steel capacities crop up all round the globe and China reduces its steel consumption on account of completion of its projects, the above chart could be in the reverse direction. Agreed that SAIL is a turnaround story, but then, the current valuations are highly stretched, practically for all steel stocks. To cut short, steel is a high-risk game, now!

    Top 5 gainers over the week
    COMPANY Price on August 8 (Rs) Price on August 14 (Rs) % CHANGE 52-WEEK H/L (Rs)
    BSE-SENSEX 3,884 3,921 1.0% 3,959 / 2,828
    S&P CNX NIFTY 1,223 1,248 2.1% 1,260 / 920
    SAIL 27 40 48.1% 40 / 6
    JINDAL STEEL 522 683 30.7% 729 / 219
    VIDEOCON INTL. 34 41 19.9% 42 / 21
    INDO RAMA SYN. 34 40 17.9% 42 / 24
    NOCIL 11 13 16.4% 14 / 5

    As far as the markets are concerned, Monday’s start was a concern due to the news that a prominent fund manager had been debarred by SEBI from the stock market on charges of insider trading and compliance inadequacies and for indulging in unfair trade practices. Also, SEBI had charged a prominent software company, Digital Globalsoft, of providing the debarred fund manager with unpublished information sensitive to the share price of the company. This news saw the markets open a little weak on the first trading day only to gain ground as the day progressed. However, for the week, Digital lost 8% on the bourses. (See table below).

    Top 5 losers over the week
    COMPANY Price on August 8 (Rs) Price on August 14 (Rs) % CHANGE 52-WEEK H/L (Rs)
    IOC 519 333 -35.8% 546 / 198
    SILVERLINE TECH. 7 6 -11.1% 32 / 5
    IND. RESORT 75 67 -9.7% 81 / 35
    DIGITAL GLOBAL 478 440 -8.0% 536 / 330
    HCL TECH 178 164 -7.9% 225 / 118

    Further, Tuesday seemingly was witness to some profit booking, but on Wednesday, the markets once again displayed strength. On Thursday however, the Sensex closed marginally in the negative, while the Nifty managed to hold positive ground. Index heavyweights supported the upward momentum of the indices, with the top index gainers being HLL (6%), Grasim (5%), BHEL (5%) and Tisco (4%).

    To conclude, we believe that at the current levels, the sentiments seem to be overplayed…as for now! 27% gains on the indices in just 4 months and a few days of August is the primary reason. However, our stand for the long-term prospects of India Inc. stand intact and we remain positive about the growth of the Indian economy. But at current levels, we feel that the steam has run out, well almost! However, even if you want to invest with a long-term horizon in mind, the safest practice would be to invest in companies with sound management and fundamentally sound business model. Happy and SAFE investing!



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