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Yet another week...

Aug 28, 2004

The above words are just appropriate to describe the trading this week on the bourses. With lack of any significant visible trigger that would help the markets gain momentum and the absence of any adverse news that would suppress sentiment, the indices continued to trade in a range, closing the week with 1% gains.The markets opened the week on the 'now usual' indecisive note. This behaviour of the indices could have been attributed to concerns with respect to the over US$ 49 per barrel of crude oil. Another factor was the near 8% domestic inflation, which could put upward pressure on interest rates thus leading to a possible disruption in the pace of India's economic growth. However, Tuesday onwards, for the next three trading sessions, the indices witnessed some strength. While there was no apparent reason for this, it was seemingly an effect of crude prices, which after nudging the near US$ 50 per barrel mark last week, started to recede consistently and are now below US$ 43 per barrel on the back of the resumption of supplies from Iraq. Value buying at lower levels and a smooth rollover of the derivatives positions also aided market momentum.

However, this winning streak was short-lived as profit booking on Friday saw the indices lose some of its gains. This was on account of the continued cautiousness with respect to investing in Indian equities. This caution can then be attributed to the high crude prices, high inflation, lack of clarity on the reforms process (decision to implement the hike in FDI in telecom, insurance and aviation postponed), the on-going trucker's strike (a near-term phenomenon), high commodity prices and the effect of all of the above on the sustenance of corporate profitability.

However, while there was no major news that could have provided the markets to react convincingly on either side, one of the two important events that took place this week was the passage of the Finance Bill (without any resistance from the opposition party as there were none to oppose in the Parliament!). It must be also be noted that the Finance Minister has deferred the tax on NRI and NRE deposits and has also raised the tax-free income limit from Rs 1 lakh to 1.11 lakh. The other big event this week was the listing of two new companies on the bourses.

New listings (BSE)
CompanyOffer/Issue price (Rs)Closing price (Rs)% ChangeHigh/Low (Rs)
ULTRATECH CEMCO343263-23.4% 339 / 249
TCS85096213.2% 1,080 / 959

Ultratech Cemco, the cement company demerged from L&T and the one in which Grasim now has a controlling stake, debuted on the bourses this week. The stock ended the week at Rs 263, which is much below the price of Rs 343 that Grasim had offered to L&T shareholders. It has to be remembered that before the de-merger, the company was the largest cement producer in the country with a capacity of close to 17 m tonnes but lacked a pan-India presence. The operating margins have also been under pressure owing to price led pressures. However, there are quite a few synergies with Grasim that if exploited might see an improvement on various performance parameters. But it would remain a long drawn process and the stock might see some pressure in the medium to long term.

TCS, the largest software services exporter from Asia and one of the most keenly awaited issue, also got listed this week. However, ever since its big bang listing on the bourses on Wednesday at Rs 1,050 (23% premium over the offer price of Rs 850 per share on the BSE), the stock has headed only southwards. At the closing price this week, TCS has a P/E valuation of 27.2x FY04 EPS. This is at a discount to Infosys current valuation of 33.7x based on its FY04 EPS. However, since TCS has a lower profitability as compared to Infosys, it would deserve valuations that are slightly at a discount to what Infosys is accorded. However, it must be noted that that the company has witnessed strong revenue growth in the past few years and investors expect this to continue as the company grows much larger in size going forward. Further, considering the fact that TCS' margins are likely to stabilise at around the current levels and those for Infosys are likely to fall further, we believe that TCS is attractive from a long-term (more than 2 years) perspective.

  • Initiating coverage on TCS

    Key gainers over the week (NSE-50)
    CompanyPrice on Aug 20 (Rs)Price on Aug 27 (Rs)% Change52-Week H/L (Rs)
    BSE-Sensex5,0655,1171.0% 6,250 / 4,098
    S&P CNX NIFTY 1,5901,6091.2% 2,015 / 1,285
    ABB7157728.0% 850 / 445
    REL. ENERGY6016437.1% 818 / 322
    BHEL5295595.8% 685 / 330
    BAJAJ AUTO8589035.2% 1,210 / 686
    TATA TEA3844035.0% 429 / 210

    Among other news during the week:

    Private sector steel major, Tisco, announced Rs 2,000 per tonne cut in steel prices forcing others to follow suit. This move by the company comes in wake of the upward spiraling inflation pressure. This move comes despite the fact that steel prices are ruling considerably higher in the international markets. This price reduction would put pressure on steel companies' margins considering the fact that raw material prices have failed to show any signs of cooling off. It must be noted that late last week, the government had further reduced import duties on various steel products. Steel stocks this week

    Key losers over the week (NSE-50)
    CompanyPrice on Aug 20 (Rs)Price on Aug 27 (Rs)% Change52-Week H/L (Rs)
    SAIL4038-6.9% 56 / 21
    TISCO260243-6.4% 326 / 155
    MARUTI372361-2.9% 600 / 195
    SCI119116-2.4% 203 / 61
    PNB258252-2.3% 397 / 154

    The inflation number announced this week at 7.94% for the week ending August 14, 2004 was a tad lower than that of the previous week, which was 7.96%. However, the government seems unperturbed by this fact as of yet as it is confident that inflation would fall from next month onwards owing to the high base effect of last year. Further, since the inflation at the retail level indicated by the consumer price index (CPI) continues to remain under control at about 3%, the government does not see a cause for panic.

    RBI provided broad hints of the continuance of a softer interest rate regime in the near-term on Thursday putting aside strengthening yields as a psychological phenomenon rather than fundamental. This seemed to have provided banking stocks some space to breathe. It must be noted that rising interest rates have a negative impact on banks treasury gains. Further, with the government seemingly toying around with the idea of encouraging consolidation in the banking sector, public sector banking stocks remained active. Banking stocks this week

    Going forward, while the near-term outlook remains clouded by concerns, the long-term prospects for equities as an asset class continue to remain promising. It must be noted that there will be some or the other concern always existent, which would make investment into equities a risky proposition. However, we believe that practicing a staggered long-term investment approach based on fundamentals would mitigate the risk factors for investors to a certain extent.


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