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Crude gets softer! - Views on News from Equitymaster
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  • Aug 19, 2006

    Crude gets softer!

    Continuing with the firm trend seen last week, the benchmark indices opened the week on a buoyant note on global cues. Beside this, the other factor that led the Indian and the global equities was the US inflation data, which was lower than expected. The Dow Jones Industrial Average and Nasdaq composite index rose 1.2% and 2.2% respectively after the US producer price index rose at a much slower rate in July. The fall in the US inflation has triggered hopes of the US Federal Reserve keeping interest rates unchanged for some more time.

    Following the announcement, the Indian indices also exhibited momentum. On Wednesday especially, the market breadth was also quite strong as 1,800 stocks gained ground as against only 726 losers. Moreover, softer crude oil prices in the international markets also helped indices cross the 11,500 levels on Thursday (a three month high).

    In the recent past, commodity stocks, including sugar, have come under significant pressure. Despite the broader indices gaining ground, sugar stocks declined 10% to 11% last week in light of sugar prices falling significantly in the global markets. As is evident from the table below, sugar prices are lower by as much as 21% in the last one month. This was on the back of reports that the global sugar market, including India, is likely to witness significantly higher output, creating an oversupply situation in the market. We concur with this view. Already, the Indian government, which banned exports of sugar from India citing short supply in the domestic market, will allow sugar majors to export in the second half of the fiscal year. But we suggest investors to look at those sugar companies that have a de-risked revenue mix for the long-term.

    Commodities face the heatů
    (% change) 1-week 1-month 1-year
    Aluminium (3.5) (4.4) 29.3
    Brent oil (5.8) (5.3) 13.5
    Copper (7.8) (6.6) 96.0
    Gold (3.5) (4.5) 39.5
    Rubber (7.3) (14.6) 4.4
    Sugar (11.0) (20.8) 17.2
    Source: ARIC

    Brent crude oil, which is perhaps the biggest worry for Central Banks across the world, fell by 6% last week (the YoY gain is just 14% currently). While there are conflicting reports with respect to the demand-supply equation for crude oil in the next three years, the fact that the United Nation structured a truce in West Asia combined with reports of higher crude oil inventory in the US resulted in a major sell-off in the global markets. In the last fortnight or so, many experts are predicting crude prices to touch US$ 40 per barrel to US$ 50 per barrel. We continue to maintain our view that it is very difficult to predict crude prices, because it is susceptible to geo-political events in the world.

    In another interesting development with respect to commodities, one of China's major steel producers, Baosteel, reduced prices by around 5% last week, indicating that supply is likely to outpace demand in the next three years. We have a negative view on steel stocks.

    Turning our attention back to the stock markets, FIIs were net buyers in the Indian stock markets last week to the tune of (Rs 14 bn). There has been a sustained inflow by FIIs since late July 2006. Domestic mutual funds also turned net buyers last week (Rs 3 bn).

    Net investments -
    (Rs m) FIIs MFs Total
    9-Aug-06 2,504 1,981 4,485
    10-Aug-06 1,519 225 1,744
    11-Aug-06 635 477 1,112
    14-Aug-06 106 325 431
    16-Aug-06 9,520 271 9,791
    Total 14,284 3,279 17,563

    The benchmark BSE-Sensex closed higher during the last week (up 2.4%). Amongst sectoral indices, BSE healthcare was up by 5%, followed by BSE Auto (4.5%) and BSE Oil and Gas (4.8%). The Ministry of Healthcare's announcement with respect to DPCO (drug price control act) was taken positively by the stock market. MNC Pharma majors were big movers in the last week. As far as the energy index was concerned, oil-marketing companies gained ground on the back of possible petroleum price revision in the first week of September 2006. In our view, from a retail investor's perspective, the risk-reward equation is skewed towards risks.

    Key indices over the week
    Index Price on
    Price on
    Aug 18(Rs)
    BSE METAL 8,164 8,080 -1.0%
    BSE IT 4,139 4,198 1.4%
    BSE BANKEX 5,048 5,129 1.6%
    BSE Small-cap 5,597 5,767 3.0%
    BSE Mid-cap 4,617 4,770 3.3%
    BSE PSU 5,271 5,452 3.4%
    BSE FMCG 1,918 1,984 3.4%
    BSE AUTO 4,713 4,924 4.5%
    BSE OIL&GAS 5,204 5,452 4.8%
    BSE HEALTHCARE 3,383 3,557 5.1%

    Having looked the institutional activity in the last one-week, let us consider some sector/stock specific developments:

    • ONGC Videsh Ltd (OVL) and Sinopec jointly acquired a 50% stake in Omimex de Columbia. Both OVL and Sinopec will pay US$ 400 m for acquiring 25% stake each. OVL will fund the deal through internal resources with support from ONGC. Columbia's national oil firm Ecopetrol will hold the remaining 50%. The net proven reserves of Omimex de Columbia is estimated at 157 m barrels. Considering that India imports around 70% of the oil that it consumes, ONGC is looking for oil and gas assets abroad to meet the energy requirements of the country. The stock was up 1.4% week-on-week. Other Energy Stocks.

      Top gainers during the week (BSE-A)
      Company Price on
      Aug 11(Rs)
      Price on
      Aug 18(Rs)
      H/L (Rs)
      BSE-SENSEX 11,192 11,466 2.4% 12,671 / 7,538
      S&P CNX NIFTY 3,274 3,357 2.5% 3,774 / 2,300
      BOM DYEING 562 734 30.7% 989 / 260
      KOCHI REF 123 155 25.9% 195 / 117
      INDUSIND BANK 38 48 25.3% 84 / 27
      ABBOTT INDIA 449 550 22.6% 785 / 412
      HPCL 222 272 22.4% 361 / 206

    • PSU refining and marketing major, HPCL, has earmarked Rs 150 bn for its Vizag project. The project includes expansion of its refinery capacity, a crude storage terminal, a petrochemicals unit and an underground cavern project to store around 60,000 MT of LPG. The company's Vizag refinery is being expanded to 15 million metric tonnes per annum (MMTPA) from the present level of 7.5 MMTPA at a cost of around Rs 83 bn. The refining capacity expansion will result in costs savings for HPCL, as it will be sourcing relatively less from other refining companies i.e. lower third-party purchases. The stock was up 22.5% week-on-week. Other Energy Stocks.

      Top losers during the week (BSE-A)
      Company Price on
      Aug 11(Rs)
      Price on
      Aug 18(Rs)
      H/L (Rs)
      THOMAS COOK INDIA 577 540 -6.4% 829 / 411
      GUJ. NARMADA 100 95 -5.3% 145 / 79
      INDIAN OVERSEAS BANK 96 92 -4.2% 133 / 66
      CROMPTON GR 222 213 -4.0% 1,225 / 210

    • Private sector steel major, Tata Steel, is planning to acquire manganese mines in South Africa and is likely to float a joint venture with a company based in that country. Besides manganese, the company is also looking for coal blocks in South Africa. The company has already acquired ferro-chrome mines in the country. With this, the company is planning to capture strategic raw materials worldwide, which is a positive. The stock was down 2.4% week-on-week. Other Steel Stocks.

    The Sensex currently trades at a PE multiple of 19.7 times trailing twelve month earnings, which is currently expensive as compared to other emerging markets. Yes, the growth in earnings of India Inc. is likely to be stronger, if commodity price falls considerably in the future. Taking things in balance, we believe that the risk-reward equation is equally poised. We are relatively cautious on commodity stocks while maintaining our positive stand on the outsourcing story. Few consumption-related sectors in India also look attractive from a long-term perspective.

    Happy Investing!



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