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Scaling peaks!

Sep 3, 2005

The bulls were again in party mood this week after having taken a break last week. While the 16-week un-interrupted rally came to an end last week, the same seems to have resumed this week with the BSE-Sensex (2.9%) and the NSE-Nifty (2.5%) up strongly. The action was, however, not restricted to just the large caps, which is evident from the near 3% gains witnessed in the CNX Mid-cap Index. Resurrection in Foreign Institutional Investors (FIIs) inflows helped the markets scale new peaks this week. The already weak Indian stock markets witnessed a dreadful start this week as they opened on a considerable weak note and at one point of time the Sensex was down over 100 points. The reason for this was the fact that crude oil prices had gone through the roof as they registered record highs. On the back of another hurricane (Katrina) that brewed on the shores of the US, fears of oil supplies from major refineries taking a hit led to crude oil prices breaching its previous lifetime highs (US$ 68) to touch US$ 71 per barrel. Nonetheless, the markets were soon able to ward off this nervousness as they proceeded to gain ground and managed to pare their losses considerably.

However, Tuesday was a different ballgame altogether. Positive statements from the RBI's annual report for FY05 and a retreat of crude prices helped power the indices up (Sensex up 111 points). Apart from this, bottom fishing would have also helped the markets in registering these smart gains. Further, this momentum sustained right through until Friday thanks to the continuous FII and domestic mutual funds (MFs) investments. Just to put things in perspective, the first four days of the trading week saw the two groups of investors invest Rs 9.5 bn and Rs 5.8 bn respectively. This pushed the indices into a newer orbit. All the major indices i.e. Sensex, Nifty and CNX Mid-cap ended the week at lifetime highs. In fact, the Sensex missed closing above the psychological level of 7,900 by a whisker (7899.77).

Top gainers over the week (NSE-50)
Company Price on
Aug 26 (Rs)
Price on
Sept 2 (Rs)
%
Change
52-Week
H/L (Rs)
BSE-SENSEX 7,680 7,900 2.9% 7,928 / 5,179
S&P CNX NIFTY 2,357 2,416 2.5% 2,427 / 1,620
ZEE TELE 171 191 11.4% 206 / 128
TATA POWER 429 470 9.5% 472 / 264
MARUTI 475 512 7.8% 522 / 338
ABB 1,551 1,671 7.7% 1,705 / 671
BAJAJ AUTO 1,413 1,503 6.4% 1,548 / 900

Now let us consider some sector/stock specific developments this week:

  • The RBI's annual report for FY05, released this week, has reaffirmed the bank's projection of a 7% GDP growth for FY06. There has also been no change in its annual inflation target of 5% to 5.5%. The annual report has not dropped any direct hint on rising interest rates although there is a mention of the liquidity overhang in the system. It has attributed the resilience in the economy to global factors to rising corporate profits, stable lending rates and a buoyant investment climate. The apex bank, however, warned the government for its inaction in raising domestic fuel prices and has pointed out that spikes in the crude oil prices could increase the fiscal burden. The projections for credit offtake in the banking sector continue to remain buoyant, with the credit deposit ratio projected at 68% for FY06. Banking stocks this week

  • Auto stocks too were in the reckoning this week. This was owing to the news that the government is planning to overhaul the tax structure for the auto industry with an objective to provide a fillip to manufacturing of compact cars in the country (by reducing the tax rates). At the same time, the government is also planning a move to discourage the use of old commercial vehicles (by increasing the tax rates). The move of reducing tax rates on small cars is likely to benefit Maruti (which was also positively impacted by the news of divestment) in a big way as a significant chunk of its sales comes from small cars (800, Alto, Zen, Swift). Apart from Maruti, the other beneficiary in the passenger car segment is likely to be Tata Motors (Indica). In commercial vehicles segment, while the news is good for both, Tata Motors and Ashok Leyland, the future plans of the latter will be affected as it has recently ventured into the used commercial vehicle segment. Auto stocks this week

  • Cement sector has been witnessing buying interest since the last few weeks on the back of strong earnings expectations as demand for cement remains strong. Cement manufacturers have been running at almost full capacity in recent times driven by the boom in housing sector and robust industrial activity. As for Gujarat Ambuja (up 5%), the fact that cement demand in the country is slated to grow at about 8% to 9% over the next few years (almost the same as has been the case in the past decade) and a favourable demand-supply situation existing in the northern and western markets, the future augurs well for the company. Cement stocks this week

    Top losers over the week (NSE-50)
    Company Price on
    Aug 26 (Rs)
    Price on
    Sept 2 (Rs)
    %
    Change
    52-Week
    H/L (Rs)
    DR.REDDY 796 781 -1.8% 877 / 605
    BHEL 1,090 1,073 -1.5% 1,155 / 532
    GRASIM 1,302 1,283 -1.5% 1,404 / 1,010
    L&T 1,327 1,312 -1.1% 1,380 / 790
    M&M 364 361 -0.8% 393 / 205

  • Software services stocks witnessed renewed buying interest after lagging the benchmark indices and other sectors for some time now. There could be many reasons. One, valuations of other sectors have gone up significantly and given the fact that tech sector has lagged, markets are pouncing on the opportunity. Secondly, with crude prices shooting through the roof, there seems to be strong interest in sectors that are not likely to be affected by the crude price rise (markets seem to be overlooking the impact on exchange rate!). However, in our view, it is better to selective in the tech sector, considering that valuations of most stocks adequately reflect medium-term growth potential. Software stocks this week

A significant correction has continued to elude the markets as yet, much to the frustration of those (seemingly largely retail investors) wanting to enter/re-enter the markets. This is because, with the smallest of corrections, a certain faction of investors takes the opportunity to join the bandwagon, which has capped the downside for the Indian stockmarkets. In fact, this weeks gains have pushed the markets into an all-new territory. This is despite the fact that valuations of most stocks are already way ahead of their fundamentals. However, we must caution investors that this extended rally is largely a factor of the immense liquidity prevailing in the markets. Thus, investors should remain all the more cautious and try hard to search for stocks that still hold value. We would advise investors not to lose patience. Markets would provide an opportunity to invest, as they have always in the past. Happy investing!


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