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Living on the edge

Aug 21, 2004

The Indian bourses ended lower for the second consecutive week amidst increasing concerns with respect to oil prices, which have failed to show any signs of cooling off. Despite the positive outlook, as yet, towards India's economic growth prospects, investors, both domestic and international, preferred to exercise caution and book some profits at every rise.


Note: For the week ended August 20, 2004, Foreign Institutional Investors (FIIs) data exclude Thurs/Fri activity

The Indian indices had been showing some resilience until a fortnight ago to the negative global cues as compared to its peers across Asia and other developed markets like the US. However, this week it was, once again, the turn of the Indian indices to face the bear hammer. This week, they underperformed most global markets on the back of rising inflation concerns. The FIIs took a negative stand towards Indian equities, as they have been net sellers in the Indian markets over the last fortnight (see chart above).

The week for Indian investors began amidst significant apprehensions with respect to the soaring oil prices and its impact on interest rates, which will soon start reflecting on global economic growth, including India. They, therefore, took advantage of every rise in market to book profits, which kept the indices rangebound. Further, the situation for the Indian economy is a tad worse considering the fact that nearly 65%-70% of the oil requirement of the country is imported, which could have a significant adverse impact on the country's current account balance. The adverse potential impact can also be gauged from the fact that India consumes over double the oil as compared to the average of OECD countries. Currently domestic inflation is already ruling at over 3-year highs, which as per the numbers released on Friday, has climbed up to 7.96%.

Key gainers over the week (NSE-50)
COMPANY Price on
Aug. 13 (Rs)
Price on
Aug. 20 (Rs)
%
CHANGE
52-WEEK
H/L (Rs)
BSE-Sensex 5,1035,065-0.7% 6,250 / 3,944
S&P CNX NIFTY 1,5981,590-0.5% 2,015 / 1,246
ZEE TELE13214611.2% 175 / 95
BPCL3223415.7% 533 / 230
WIPRO5345655.6% 623 / 310
SAIL38405.6% 56 / 21
INFOSYS1,4801,5474.5% 1,582 / 755

However, while the indices remained largely rangebound, news based corporate action continued on the bourses.

  • Zee Telefilms was the top gainer amongst the index stocks this week. This can be attributed to the possibility of the company bagging the cricket telecast rights from the BCCI. Further there are indications that the company is contemplating launching a sports channel in the second year of winning the telecast rights. This event would be a bog booster for Zee in terms of garnering greater share of the ad revenues pie and would aid it's DTH venture as the company would offer the same to its subscribers. Other media stocks.

  • The government announced cuts in excise and custom duties on petroleum products this week. This move is likely to benefit oil-marketing majors, mainly IBP (down 6%), which is a pure marketing player and HPCL (up 2%) and BPCL (up 5%), which sell more than their own production. Although India does not import petro products significantly, custom duties play an important part in calculation of prices at the refinery gate, thereby, providing sufficient protection to refineries. The latest announcements come as a negative for pure refinery companies such as Kochi Refineries (down 3%), MRPL (down 7%) and Reliance Industries (down 3%) that has not been able to roll out its retail network significantly.

    Key losers over the week (NSE-50)
    COMPANY Price on
    Aug. 13 (Rs)
    Price on
    Aug. 20 (Rs)
    %
    CHANGE
    52-WEEK
    H/L (Rs)
    DR. REDDY740686-7.4% 1,471 / 675
    TATA POWER268249-6.8% 450 / 159
    BHEL563529-6.0% 685 / 311
    BHARTI TELE151143-5.3% 189 / 56
    CIPLA244231-5.1% 284 / 167

  • Dr. Reddy's topped the loser's list this week. The stock has been in the bear grip in recent times, the major reason being investors' concerns over its growth and dwindling margins. With no new product launches in the near-term and margins likely to remain under pressure owing to higher competition in the US generics market and a hike in R&D expense, the stock has remained out of investors' radar. Other pharma stocks

  • Bharti Tele was another key loser this week. The below than expected June quarter performance has seemingly triggered fears amongst investors that this may be an indication that the company's performance has peaked at least in the near term. However, we continue to believe that the company has a lot of potential due to the rapidly growing telecom sector in India. However, the company might not continue to witness explosive growth as was seen in the last 2-3 years. Also, if the government does not facilitate further growth of the sector (including the hike in FDI), then even large companies like Bharti Tele could come under pressure to sustain performance.Other telecom stocks.

To conclude, over the last few weeks, not much has changed as far as the global scenario is concerned. Rather, it has only deteriorated considering the fact that crude oil prices have risen from US$ 46 per barrel to near US$ 49 this week. This is likely to continue to keep investor sentiments suppressed until the oil issue subsides convincingly. Thus, while, as yet, the bright growth prospects of the India Inc. is helping the indices to largely hold ground, which is protecting a sharp downslide, the overall situation now warrants a closer watch, as such high oil prices has the potential to seriously dent corporate India's profitability in more ways than one. Happy Investing!


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