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Markets @ 8,000: Time to introspect?

Sep 10, 2005

The markets defied gravity and moved into uncharted territory as the BSE-Sensex breached the psychological 8,000 barrier during the week. The bulls sent the bear camp fleeing, resulting in they preferring to hibernate, inturn letting the bulls party all week. It must be noted that the week was confined to only 4 trading days, but this did not stop investors from pushing the indices to new highs albeit without much fanfare. The markets closed in the positive territory on all the trading days during the week and finally ended with a 160 points gain. A kicker for Indian petroleum marketing companies during the week was that of the ministry agreeing to raise retail prices of petrol and diesel by Rs 3 and Rs 2 respectively. However, this hike is just a temporary relief as petrol is under-priced by Rs 7.45 per litre and diesel by Rs 5.15 per litre and despite the hike, oil marketing companies will continue to post losses as international crude prices are much higher.

On Thursday, the Sensex soared 106 points and created history in the bargain. Apart from this, bottom fishing would have also helped the markets in registering these smart gains. Further, this momentum sustained right through until Friday, albeit not without some element of volatility, thanks to the continuous Foreign Institutional Investors (FIIs) and domestic mutual funds (MFs) investments.

Top gainers over the week (NSE-50)
COMPANY Price on Sept 02 (Rs) Price on Sept 09 (Rs) % CHANGE 52-WEEK H/L (Rs)
BSE-SENSEX 7,900 8,060 2.0% 8,078 / 5,270
S&P CNX NIFTY 2,416 2,455 1.6% 2,463 / 1,642
ABB 1,671 1,815 8.6% 1,870 / 671
ICICI Bank 482 514 6.7% 555 / 262
SBI 806 858 6.4% 862 / 436
HDFC Bank 636 676 6.2% 765 / 379
PNB 405 429 5.8% 520 / 232

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

The CMIE (Centre for Monitoring Indian Economy) released data this week and has divulged an alarming negative growth (2.2% YoY) in household savings in FY05. This is the first time that the net financial savings has posted a negative growth since FY96. The same can be attributed to just a 10% YoY growth in financial assets, compared to a massive 65% YoY growth in financial liabilities. Also, it must be noted that only 1.1% of the annual savings are invested in shares and debentures. Given that the incremental advance growth continues to be strong in the banking sector in 1HFY06, low savings rate and lack of sufficient deposit mobilisation poses a threat of liquidity crunch for banking sector and calls for interest rate hike going forward. Further, SBI, the country's largest bank, is gearing up for road shows, with four new products to persuade the IMD holders to reinvest their deposits with the bank. The IMDs (India Millennium Deposits) due for redemption in December 2005, amount to US$ 7 bn inclusive of interest liability. The bank has thus designed four innovative products (linked to LIBOR) with premium coupon rates so as to retain most of the funds with itself. The said products are five-year deposits with staggered rates of interest and also have a cap beyond which interest rates cannot rise. Investors also have the option of redeploying the funds in FCNR deposits or the overseas fund launched by SBI Mutual Fund. However, the fact that most of the IMDs are leveraged, limits the possibility of the bank retaining a major portion of the IMD funds. This may cause some margin pressures to the bank because of lack of deposit mobilisation. Banking stocks this week

Hindalco gained ground during the week on the back of the news that the company is planning to acquire a stake in Philippines' Lepanto Consolidated Mining (LCM) in order to secure its (copper) raw material requirements. It should be noted that the company has already acquired two copper mines in Australia. These mines account for around 20% of Hindalco's copper ore requirements. The planned new acquisition, which has as yet not been confirmed by the management, is in line with the company's strategy of meeting 40% of its copper ore requirements from captive sources. In wake of the improving TcRc charges, this move would be a positive. Aluminium stocks this week

Tobacco major and conglomerate ITC saw buying interest during the week on the back of the news that that the company is planning to open two '7 star' hotels in the country, one in Bangalore and the other in Chennai. As per the company, it plans to build 'super luxury' hotels of international standards, and is ready to shell out the requisite funds for the same. It must be noted that as per international norms, a 7 star hotel requires to have a route from the airport to the hotel without a traffic signal on the way. However, EIH (Oberoi chain of hotels), which has a 7-star hotel in Rajasthan, does not confirm to this standard. Margins for the hotel segment stood at 38.2% in 1QFY06 and growing at a rate of 35%. Also, its other businesses like paperboards and foods are doing well and dependence on a single segment (tobacco) is on the decline, which is a positive considering the high tax and continuous government intervention it attracts. Further, the company is hunting for acquiring a hotel in U.K, as it is a tourist hotspot. Food & Tobacco stocks this week

Top losers over the week (NSE-50)
COMPANY Price on Sept 02 (Rs) Price on Sept 09 (Rs) % CHANGE 52-WEEK H/L (Rs)
Zee Tele 191 184 -3.7% 206 / 128
Ranbaxy 543 526 -3.1% 640 / 435
Tata Power 470 458 -2.5% 478 / 281
BPCL 384 375 -2.5% 475 / 331
TCS 1,427 1,392 -2.5% 1479 / 976

Auto stocks found favour among participants inspite of the recently announced hike in fuel prices. It should be noted that fuel prices account for around 55% of the total operating costs of a freight operator (the consumer of the commercial vehicle). Thus, any price hike in the fuel price can directly affect their earnings which can ultimately affect the demand for commercial vehicles and hence the performance of the commercial vehicle manufacturers. Further, it should be noted that post the previous price hike, the difference between the fuel price index and freight index has widened. Auto stocks this week

However, all said and done, retail investors who missed the bus are yet in a fix as to what levels should one enter at, as at every rise, investor's expect a correction and this has just not happened. This is despite adverse events, such as all-time high crude prices, which appear to have been completely discounted by the markets that have risen mainly on the back of unprecedented liquidity flowing into the Indian markets. This liquidity flow has, thus, capped the downside and the expected correction has not materialized. In fact, this week's gains have pushed the markets into uncharted territory. This is despite the fact that valuations of most stocks are already way ahead of their fundamentals. In our view, we caution investors that this extended rally is largely a factor of the immense liquidity prevailing in the markets, as mentioned above. Thus, investors should remain all the more cautious and search for stocks that still hold value. We would advise investors not to lose patience as everyone will surely get an opportunity, as there are always opportunities in the equity markets.

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