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
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 -
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
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)
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)
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.
More Views on News
Jun 10, 2017
Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.
Aug 19, 2017
Ever heard of Lindy Effect? Find out how you can use it to pick timeless stocks.
Aug 18, 2017
Buying the index now will hardly help make money in stocks even in ten years.
Aug 18, 2017
Donald J Trump, a wrasslin' fan, took a 'Holy Sh*t!' blow on Tuesday.
Aug 17, 2017
PersonalFN simplifies the mutual fund account statement for you.
More Views on News
Aug 7, 2017
The data tells us quite a different story from the one the government is trying to project.
Aug 10, 2017
Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.
Aug 8, 2017
Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...
Aug 12, 2017
The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.
Aug 7, 2017
Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...
Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement. LEGAL DISCLAIMER:
Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here
. The performance data quoted represents past performance and does not guarantee future results.SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.
Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: firstname.lastname@example.org. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407