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12K ahoy! What next?

Sep 16, 2006

The week gone by has been a fairly choppy one for the Indian indices. Although on the face of it, it seems that the week was a relatively uneventful one, with the Sensex and the Nifty gaining 0.8% and 0.2% respectively, in reality, it proved to be a week of extremes. While Monday saw a bloodbath on the major indices, the markets saw strong recoveries on all the remaining days of trade. With the indices now nearing their all-time highs hit in May this year, it appears that participants are getting edgy again. From these levels, the possibility of significant upsides, at least in the near-term, appears limited, given that the BSE Sensex now trades at 20.6 times its trailing 12-month earnings. As regards the action during the course of last week's trade, Monday saw a day of bear carnage, as weakness was seen across Asian markets, and participants appeared keen to take profits off the table after decent gains witnessed in the previous week. The Sensex lost over 3%, falling by as many as 368 points. This fall would have brought back unpleasant memories of the crash seen in May earlier this year, when the benchmark index corrected from its all-time high levels by around 30%. However, Tuesday saw the bulls regaining momentum, as the Sensex gained over 100 points.

Come Wednesday, the markets saw the best day of the week, gaining 233 points, or over 2%, as lower crude oil prices and strong Asian indices propelled the Sensex to greater heights. The remaining 2 days of trade also saw the indices gaining ground, as the massive fall seen on Monday was erased from memory, leading to net gains for the week. However, Friday's trade was characterised by some amount of volatility, with the opening being weak, and markets recovering only post-noon on buying at lower levels.

As far as the institutional activity on the bourses was concerned, Foreign Institutional Investors (FIIs) were net buyers this week to the tune of Rs 9.3 bn. Domestic mutual funds (MFs), on the other hand, turned out to be net buyers to the tune of Rs 6.0 bn.

Net investments
(Rs m) FIIs MFs Total
8-Sep-06(489)1,9291,440
11-Sep-06 947 (795)152
12-Sep-06 (1,206) 1,125 (81)
13-Sep-065,194 3,818 9,012
14-Sep-064,916 (24)4,892
Total 9,362 6,054 15,416

The benchmark index, the BSE-Sensex, closed higher during the last week by 0.8%, while the NSE-Nifty managed to gain a more subdued 0.2%. As regards sectoral indices, the BSE Bankex proved to be the biggest gainer this week, gaining as much as 5.2%. Apart from this index, none of the other indices, barring the BSE IT index, managed to record any significant gains. The BSE Metal index proved to be the biggest loser, shedding nearly 5% week-on-week. The BSE FMCG and Healthcare indices also lost ground during the week.

Key indices over the week
IndexAs on September 8As on September 15% Change
BSE AUTO5,207 5,198 -0.2%
BSE BANKEX5,362 5,642 5.2%
BSE FMCG2,036 2,009 -1.3%
BSE HEALTHCARE3,633 3,597 -1.0%
BSE IT4,273 4,330 1.3%
BSE METAL8,626 8,223 -4.7%
BSE OIL&GAS5,743 5,716 -0.5%
BSE PSU5,654 5,679 0.4%
BSE MIDCAP5,041 5,035 -0.1%
BSE SMLCAP6,031 5,986 -0.8%

Having looked the institutional activity in the last week, let us consider some sector/stock specific developments:

  • Public sector banking major, IDBI, has emerged as the RBI's choice for the take over of the ailing United Western Bank (UWB). The latter was placed under a moratorium on September 2, 2006 after its net worth turned negative. Under a draft scheme of amalgamation, the RBI has asked the boards of both banks to ratify the proposal by September 27. The said scheme will protect the depositors and pay the shareholders Rs 28 per share (30% premium to the current market price) for shares held on the record date. Once the scheme is accepted, all UWB assets and liabilities will be transferred to IDBI and the employees will be retained in the merged entity on the same terms as earlier. The addition of UWB's 230 branches (87% of which are in Maharashtra) to IDBI's 195 branches will sum up to 425 branches for the combined entity and give IDBI a considerable presence in the rural and SME segments. While IDBI's net NPAs are 1.0% against UWB's 5.9% (as on 1QFY07), the former's NIMs (0.5%) are lower than that of UWB (2.2%). The stock was up 6.5% week-on-week. Other banking stocks.

  • NIIT Limited, India's largest IT training major, has announced its foray into management education. Three IIMs - Ahmedabad, Kolkata and Indore - will now make their executive development programmes available at six remote learning centres in the country on the technology platform provided by NIIT. The classes would be run after-working hours and on weekends, enabling the students to continue with their jobs and pursue education simultaneously. NIIT, under project `Imperia', will foray into management education, and set up centres in Delhi, Mumbai, Kolkata, Chennai, Bangalore and Hyderabad. The company plans to have 75 remote classrooms in the next five years with an investment of Rs 200 m. The duration of these courses range from four months to one year and the fees from Rs 54,000 to Rs 194,000. This will help the company to increase its revenues and position itself as a broader player in the education space, apart from IT training. The stock was flat week-on-week. Other software stocks.

    Top gainers during the week (BSE-A)
    CompanyPrice on
    Sept 8 (Rs)
    Price on
    Sept 15 (Rs)
    %
    Change
    52-Week
    H/L (Rs)
    BSE-SENSEX 11,91912,0100.8%12,671 / 7,656
    S&P CNX NIFTY 3,4713,4790.2%3,774 / 2,307
    ESCORTS9010921.1%114 / 53
    CORPN. BANK32035812.0%435 / 205
    ZEE TELE2913209.9%324 / 139
    UNION BANK1161289.7%149 / 81
    VIJAYA BANK47529.4%72 / 33

  • Hair oil major, Marico, has acquired an Egypt-based company Fiancee, owned by the Ready Group. This marks its entry into the Rs 1.7 bn hair-care market in Egypt through the brand. The deal, for an undisclosed consideration, envisages acquisition of the brand by Marico as also direct investment in Egypt. Fiancee range includes value-for-money hair creams and hair gels. It is a market leader and commands a share of about 20% of the Egyptian hair care market. The brand is a market leader in key segments such as gels and gel creams. Marico's acquisition gives it access to the manufacturing and sales infrastructure. The consideration for the deal will be paid out over the next 6 months in two tranches, based on the brand's performance. Marico has already paid one tranche using a short-term loan facility. Marico would now take a fresh look at its financing pattern and would modulate the debt and equity mix suitably. This acquisition is in line with company's strategy to increase its international business. The stock was up 1.8% week-on-week. Other FMCG stocks.

    Top losers during the week (BSE-A)
    CompanyPrice on
    Sept 8 (Rs)
    Price on
    Sept 15 (Rs)
    %
    Change
    52-Week
    H/L (Rs)
    HINDUSTAN ZINC654594-9.2%1,119 / 195
    HINDALCO184169-7.9%251 / 113
    HCL INFOSYS163152-7.1%279 / 116
    CESC LTD.317296-6.6%370 / 178
    RCF46 43 -6.0%72 / 28

  • Bharti Televentures' prepaid subscriber base has seen high levels of company-initiated churn, as part of the verification drive following reports of anti-social activities in the country being perpetrated through usage of a number of connections with fake identities. As reported, Bharti has switched off connections of almost 2.8 m of the 6 m prepaid subscribers that it has verified till now. Overall, across all service providers, 4.8 m of the 13.5 m prepaid subscribers have been forced out of the service, making it a high ratio of 1 in every 3 verified. Importantly, telecom companies have only verified around 19% of the total prepaid subscribers in the country (around 72 m). As such, if the current rate of churn were to continue, it can possibly dent the country's target of reaching 200 m mobile subscribers by the end of 2007 (around 4.8 m incremental additions for the next 16 months). Individual companies might also be impacted, though the scale may differ. The stock was up 3.7% week-on-week. Other telecom stocks.

So, what can investors do now at levels of over 12,000? We believe that, in the near-term, valuations adequately reflect growth prospects. In many cases, valuations factor in growth over the next one-and-a-half to two years, making this a somewhat similar scenario to the one we saw in May this year, when valuations were completely out of sync with reality. The fact is that the Sensex is now very close to its all-time highs hit in May, and whether another fall can happen of the magnitude that was seen in that month - is a matter of conjecture.

What we would certainly say is that at current levels, investors need to be cautious, as buying opportunities have reduced, particularly in the large caps. Pockets of overvaluation certainly exist, such as in cement and construction stocks, while there are fewer opportunities for true ‘value investors'. With the 2QFY07 results season not too far away, this could dictate the near-term future of the indices. In the first quarter, India Inc's results largely saw positive surprises from many companies, particularly from those in the cement and software sectors. Whether or not such performances can be sustained will be seen this time around. According to us, there has been significant appreciation witnessed since the lows hit in mid-June, and even if 2QFY07 results show positive surprises in general, this has already been factored in. In fact, if any negative surprises are seen, then the possibility of a decent correction is strong.

Thus, it is evident that, with not too much value left in the markets, it would be prudent for investors to adopt a cautious approach. We see greater value in mid-caps as opposed to large caps at current levels. Stories with good visibility, such as software, would surely be good bets for the future, of course, needless to mention, at the right valuations. A long-term view is definitely advised, as we always have, apart from a detailed and dispassionate study of the fundamentals of the companies. To conclude, we remain positive on the ‘India story' over the long-term. Just ensure that you buy it at the right price. Happy Investing!

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