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August 2006: The return of the indices - Views on News from Equitymaster
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  • Aug 28, 2006

    August 2006: The return of the indices

    Initial feelers post the 1QFY07 results turned out to be very positive and investors reposed full faith in the market's ability to rise further from the lows of May 2006. If August is any indication, then the investing community has surely 'walked the talk'. The indices have performed admirably and if any one would have invested in the markets based on the positive results from India Inc, he would have walked away richer by Rs 11 on every Rs 100 invested. However, this is just the story of the indices and there were stocks that far exceeded this return. Let us have a look at the top five stocks from the Nifty that gained the most in the past month, a month that marked the return of the indices.

    July'06 August'06 % change
    BSE-Sensex 10,416 11,572 11.1%
    NSE-Nifty 3,041 3,386 11.3%
    PNB 346 454 31.2%
    Siemens 839 1,051 25.3%
    M&M 529 652 23.3%
    BHEL 1,830 2,250 23.0%
    Suzlon Energy 992 1,215 22.5%

    PNB - Renewed interest
    Perched right on top is PNB, India's second largest PSU bank. The counter has gained 31% in one month, impressive by any yardstick. Although the fundamentals of the bank were never in doubt - it enjoys one of the highest NIMs among all the banks in the country - its growing NPAs had become a cause for concern in recent times. However, things seem to be changing now as aggressive provisioning has enabled the bank to clean up its balance sheet and bring down the level of NPAs to reasonable levels. The bank enjoys one of the highest percentages of low savings deposits and this will hold it in good stead in the current rising interest rate scenario. On account of these positive factors, investors have rewarded the stock and have put it right on top in the list of gainers in the past month. We believe that after the recent run, most of the near-term upside seems to have taken care of, but remain positive on the long-term prospects of the company.

    BHEL, Siemens & Suzlon Energy: Packing a 'power'ful punch
    For a developing country like India, the need for uninterrupted and cost effective supply of power cannot be emphasized enough. As per estimates, if the current growth in the economy needs to be sustained, India will need to add a whopping 100,000 MW of generation capacity in the next 10 years! To put things into perspective, this is almost equal to the current capacity in the country. Little wonder then, that power generation and transmission equipment companies like BHEL, Siemens and Suzlon Energy have become the favorites of growth and value investors alike.

    Courtesy the continued flow of big-ticket orders during 1QFY07, these companies have emerged among the top five gainers in the past month. While Siemens has gained 25% and has occupied second place, BHEL and Suzlon Energy have each reported a gain of 23% and have stood at fourth and fifth places respectively in the period under consideration. As far as our opinion is concerned, although these companies have strong order book visibility and proven execution capabilities, valuations seemed to have factored in near-term growth and hence, the risk is slightly on the higher side.

    M&M - Hands in many pies
    Completing the list is M&M, India's largest UV and farm equipment manufacturing company. The company has added a sizeable 23% to its market cap in the last month. The optimism towards the company has seemingly stemmed from the fact that the automotive business, the company's mainstay, is now not the only one driving its growth, but its investments in growth sectors like real estate and software have also started yielding rich dividends. While the divestment of some of its stake in Mahindra Gesco and M&M Financial Services earlier helped it unlock significant value, the impending IPO listing of Tech Mahindra, its tech subsidiary, is likely to give a further fillip to its fortunes. Going forward, while rising interest rates and crude prices might subdue the performance of its automotive division, the immense potential of its subsidiaries could well ensure that M&M's growth engine keeps on chugging.

    Having had a look at the top five stocks in the past month, one thing emerges - while growth in these companies is far from reaching its peak, current valuation levels are slightly disturbing. While we have full faith in the long-term India story, selecting a fundamentally strong value stock based on a 2 to 3 year horizon is getting increasingly difficult. It will be as crucial at this juncture to identify the potential downside, as it will be to analyse future growth prospects, which is what we have always maintained. Happy investing!



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