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Plain euphoria!

Sep 17, 2005

There are no better words to describe the rally currently being witnessed on the Indian bourses. It has been pouring (read FII inflows) and pouring hard on the Indian stock markets, which has pushed the Indian indices well beyond the expectations of 'most' of the optimists. The BSE-Sensex this week closed just shy of the 8,400 levels after having gained almost 4%. The NSE-Nifty too logged in similar gains this week. There was buying witnessed in mid-caps too, which was relatively less exciting. The CNX Mid-cap Index ended the week higher by 2.7%. Riding on the back of 8-days of consecutive gains, the Indian stock markets began on a firm note this week with the Sensex trading comfortably in the 8,100+ zone. Riding strong on the back of strong FII and domestic MF inflows, the indices continued to register new lifetime highs by the hour on Monday. This trend continued into Tuesday's trade as well, which helped the Sensex breach the 8,200 levels before close of trade. Going into Wednesday's trade, there was considerable choppiness witnessed on the bourses owing to profit booking at higher levels. This saw the Sensex snap the 10-day gaining streak as it closed marginally in the red. However, this was only a temporary joyous moment for the bears as the bulls came back with greater vigour over the next couple of days with the Sensex gaining 94 and 97 points on Thursday and Friday respectively.

While the markets continue to make new lifetime highs, this development has come about without any major positive fundamental development and the overlooking of negative news (like crude oil). While Securities and Exchange Board of India's (SEBI) approval for liberal norms pertaining to the futures & options segment for domestic MFs may have aided sentiments in the second half of the week, it is sheer liquidity that is driving the indices to unimaginable heights. Money has been pouring in from all factions of the market - Foreign Institutional Investors (FIIs), domestic mutual funds (MFs) and non-institutional investors (see chart above).

Further, there have been reports of domestic MFs garnering huge funds from investors and new India-focused funds globally coming into existence. To add to this, the Finance Minister's statement pertaining to higher agricultural growth in FY06 than originally envisaged and SEBI's confirmations that they have been constantly keeping an eye on market movements for any irregular developments, have helped create/sustain confidence amongst investors.

Top gainers over the week (NSE-50)
COMPANY Price on Sept 09 (Rs) Price on Sept 16 (Rs) % CHANGE 52-WEEK H/L (Rs)
BSE-SENSEX 8,060 8,381 4.0% 8,389 / 5,401
S&P CNX NIFTY 2,455 2,552 3.9% 2,555 / 1,677
HDFC 918 1,065 16.0% 1,081 / 570
IPCL 191 222 16.0% 224 / 156
MARUTI 511 562 9.9% 584 / 338
BHARTI TELE 332 363 9.5% 365 / 140
GAIL 243 266 9.4% 276 / 183

Now let us consider some important sector/stock specific development this week.

  • Maruti, the country's largest car manufacturer, will be launching a diesel car by the end of 2006. This move will enable it to capture a share of the fast growing diesel car market in the compact car segments, as there is no other significant player except for Tata Motors (Indica). It should be noted that the demand for diesel cars account for more than 20% of the total domestic demand for passenger cars. Apart from this news, the management has also made an announcement of introducing 5 new models in the next five years. These developments were enough to push the stock higher by 10% during the week. Other auto stocks

  • Bharti Tele was another big gainer with the stock ending the week almost 10% higher. While there was no particular development to justify the strong gains made by Bharti, it seemed largely a factor of the positive sentiments brewing in favour of the company. This is due to the continuation in robust performance of the company on the GSM subscriber base addition front. During the month of August 2005, the company added a net of 0.6 m subscribers, around 31% of the incremental addition reported by the Indian GSM industry. Moreover, the company grew its base by 72% over August 2004, much faster than the 53% YoY growth reported by the industry. The company currently commands a 27.4% share of the Indian GSM subscriber base. Other telecom stocks

  • The stock of Hindalco (up 7%) was also in the reckoning this week. The news of the company considering issuance of shares on a rights basis as one of the various financing options to fund its expansion plans went down well with the markets. It should be noted that the company has outlined an expansion plan of Rs 250 bn over the next three to four years, which includes the expansion of both - its aluminium and alumina capacities. The other option that the management is seemingly contemplating is an FCCB issue. Other aluminium stocks

    Top losers over the week (NSE-50)
    COMPANY Price on Sept 09 (Rs) Price on Sept 16 (Rs) % CHANGE 52-WEEK H/L (Rs)
    GLAXO 903 878 -2.7% 925 / 612
    ABB 1,815 1,785 -1.6% 1,880 / 671
    HERO HONDA 694 685 -1.3% 711 / 412
    SHIP. CORP. 162 161 -0.4% 188 / 125
    ACC 477 476 -0.3% 487 / 247

  • The board of GE Shipping (GES) has approved the de-merger of the company's offshore services business into a separate company - Great Offshore. The offshore business consists of drilling services, marine logistics, marine construction and port/terminal services. As per the approval, GES' shareholders will be issued, at no cost, 1 fully paid share of Rs 10 each in Great Offshore for every 5 shares they hold in GES. Further, consequent to this allocation, the shares held in the GES will stand re-organised to 4 shares of Rs 10 each for every 5 shares that investors currently hold. Post the de-merger, shares of Great Offshore will be listed on the BSE and the NSE. However, this move can increase volatility in GES' performance in the future as the offshore business has been considered to be relatively stable than the shipping business and has cushioned the overall volatility to some extent. The stock lost 2% this week. Other shipping stocks

With the Sensex trading at 17.4 times its trailing 12-month earnings and 15.0 times one-year forward earnings, valuations continue to remain stretched. Going forward, we believe, with little value left on the table for investors across sectors/stocks, it is advisable to just sit back and introspect about the sustainability of this liquidity driven euphoria. It would be a wise move now to think about what could go wrong that could lead to investors, especially FIIs, pulling out their investments from Indian equities. While our concern should not be construed as if we are bearish on the markets, since we continue to believe that Indian equities is one place to remain invested in for the next 3 to 5 years, we do believe that investors must now strictly follow a bottom-up approach in investing and avoid getting lured by rumours and extra-ordinary stock price movements.

In fact, at this point of time, investors must remember the famous quote by the legendary billionaire investor, Warren Buffet, "only buy something that you'd be perfectly happy to hold if the market shut down for 10 years". Happy investing!

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