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Shrugging off concerns?

Sep 4, 2004

Markets seemed to have eased their concerns somewhat on the oil and inflation front and are seemingly looking at beyond these two issues, which have been hogging the limelight in recent times. This was evident from the near 2% gain in the Indian indices during the week. The week saw a firm start to the indices, as the end of the truckers strike not only brought relief to corporate India but also to investors, who were getting increasingly worried about its impact on inflation. An elongated strike could have seriously impacted trade (not that it did not), which would have been reflected in higher prices of food articles, commodities and other products. Further, another worrying factor, oil, had also shown signs of consolidating at lower levels in the early half of the trading week, which again helped comfort investor's subdued sentiments. Apart from a small blip on Thursday, markets closed in the positive on the other four trading sessions.

Among the corporate snippets during the week:

Paying heed to the plight of the banking sector in wake of firming yields of G-Secs in the debt markets, the Reserve Bank of India (RBI) has relaxed the 25% cap on banks' investments in the held-to-maturity (HTM) category as a one-time measure in FY05. By doing this, it has provided some breathing space to banks considering that now they will not be required to mark-to-market a larger proportion of their securities portfolio. This will assist the banks in warding off a larger hit on their bottomlines in FY05 as strengthening yields leads to falling bond prices, thus adversely affecting their other income component. Banking stocks this week

Key gainers over the week (NSE-50)
CompanyPrice on
Aug 27 (Rs)
Price on
Sept 3 (Rs)
H/L (Rs)
BSE-SensexBSE-SENSEX 5,1175,2182.0% 6,250 / 4,098
NSE-NiftyS&P CNX NIFTY 1,6091,6341.6% 2,015 / 1,285
PNB2522779.9% 397 / 154
TATA POWER2552799.7% 450 / 159
INDIAN HOTELS3563878.5% 492 / 237
MARUTI3613897.8% 600 / 195
TATA TEA4034296.5% 432 / 210

Maruti has been gaining ground in the recent past and the 32% growth in volume sales in the month of August further aided sentiments. While monthly volumes continue to remain robust, we believe that operating margins are likely to plateau at current levels. Since the auto market is becoming extremely competitive, the cost of launching new models and maintaining overall margins will be a challenge. There exists the threat of demand slowdown due to higher petroleum product prices and hardening of interest rates. Overall, we would remain cautious about the profitability of the company going forward. The stock gained near 8% this week. Other auto stocks this week

The Bharti Tele stock has been consistently losing ground over the last few weeks, having lost about 16% since mid-August. While the QoQ growth during the June quarter was one of the disappointment factors for the stock, the re-emergence of the tariff war, in order to maintain growth momentum on the subscriber additions front, has further dented investor sentiments towards the stock. The reduction in tariffs is likely to hit the Average Revenue Per User (ARPU) figure of all the mobile service providers.

Key losers over the week (NSE-50)
CompanyPrice on
Aug 27 (Rs)
Price on
Sept 3 (Rs)
H/L (Rs)
TATA CHEM129122-6.0% 189 / 84
BPCL356338-5.1% 533 / 230
BHARTI TELE140134-3.9% 189 / 58
COLGATE144140-2.8% 175 / 102
CIPLA240235-2.2% 284 / 185

The announcement of a possible merger of Kochi refineries with its parent, BPCL, led to heightened activity in both the stocks. During the week, while BPCL lost 5%, Kochi Refineries gained about 6%. This could be attributed to the fact that that Kochi Refineries has got a better deal as compared to BPCL. Our analysis on the possible merger

To conclude, the high level of inflation continues to remain a cause for concern, which touched 8.17% for the week ended August 21, 2004 as per the numbers released on Friday. Further, the cautious stand taken by the RBI towards the country's GDP growth in FY05 and its now 'neutral' approach towards interest rates from the earlier 'soft' approach are enough reasons for investors to practice caution. Though domestic inflationary pressure could ease by the following fortnight, it must be noted that it continues to remain a threat to the pace of India's economic growth. Further, it must be noted that after the near 11%-12% correction in global crude oil prices, the last couple of days have again seen them strengthening and they continue to rule near the mid-forties per barrel mark. Until these recede to the mid-thirties, it wouldn't be safe to assume that global economies (including India) are out of the woods. However, this is a relatively near-term phenomenon and investors with a long-term investment horizon could continue to build their portfolio.

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