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Markets: Where to from here? - Views on News from Equitymaster
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  • Sep 19, 2006

    Markets: Where to from here?

    After the sharp correction witnessed on the Indian bourses towards the end of May and in June, the indices have once again crossed the 12,000 milestone. That said, the journey has been a rough one with concerns over rising crude prices and interest rates, both globally and in India and India-specific events such as terrorism (read the bomb blasts in Mumbai), monsoon mayhem across parts of the country keeping investors and the common man alike on their toes. In this article, we take a look at the performance of some of the sectoral indices in the last three months and the likely prospects going forward.

    Performance in the last three months
    Index As on
    June 14, 2006
    As on
    Sep 15, 2006
    BSE IT 3,044 4,330 42.3%
    BSE BANKEX 4,017 5,642 40.5%
    BSE-Sensex 8,929 12,009 34.5%
    BSE AUTO 4,029 5,198 29.0%
    BSE HEALTHCARE 2,828 3,597 27.2%

    Software: The BSE IT index, since its lows hit in mid-June, has gained 42%. Undoubtedly, at that time, significant and mouth-watering buying opportunities had emerged in these stocks. It must be noted that Infosys, Satyam, TCS, Wipro and HCL Tech collectively account for over 90% of the weightage of the BSE IT index, and the strong stock performance of these companies has meant that the overall index has also moved up significantly. As regards valuations, we believe that most of these stocks have run up quite a bit, and are fairly valued in the near-term, taking into account growth prospects adjusted for risk. However, from a long-term perspective, we believe that these top-tier software companies, with their superior scalable business models and stronger operating metrics relative to their mid-sized peers, will benefit more from the offshoring story, and we remain positive overall on the sector.

    Banking: Banking stocks have been amongst the forerunners in the rally witnessed on the bourses over the past three months. The reasons that can be cited for the same are reiteration of confidence in fundamentals and improved valuations. The severe liquidity crunch reported by various monetary agencies (including the RBI) had led to investors speculating a slow down in deposit growth and resultantly pressure on NIMs (partly due to rise in interest rates). However, the 1QFY07 results reported no change in the fundamentals of the larger banking entities and reinforced investor confidence in them. Also, although concerns regarding NIMs and asset quality continue to linger, the valuations adhered to the banking entities (especially the PSU ones) have considerably improved, leading to the run-up in prices.

    Auto: The auto index has registered gains of 29%. This was seemingly on the back of the continued robust sales numbers being posted by auto companies across segments. It was being feared that with inflationary factors in the form raw material cost escalation, crude oil prices, interest rate hikes looming large before the sector, the performance might witness a downward spiral. The fears however proved to be unwarranted as auto sales have remained firm and have thus enabled the companies to mitigate the effects of higher input costs. Moreover, courtesy the cyclical upswing in segments such as CVs and passenger vehicles, sector companies have pared debt on the balance sheet to a significant extent and hence have not been affected much by the rise in interest rates. Going forward, however, we expect pressure on the cash flows, as most of the companies have substantial capex plans lined up. Further, if the growth in the industry does not pan out along the expected lines, break even for the new capacities might just get prolonged.

    Healthcare: The healthcare index notched gains of 27% during the said period. While the first few months of 2006 saw most of the major pharma companies being fairly valued, the correction in May and June brought down the valuations of these companies to reasonable levels. Since then, a slew of factors have contributed to the rise in the healthcare index. Positive developments in the global generics markets in terms of success in patent challenges have contributed favourably to the fortunes of Ranbaxy, Dr.Reddy's, Cipla and Sun Pharma. These companies posted strong results in the June quarter as well. While the performance of the MNC pharma companies left a lot to be desired in the June quarter, the raising of the ceiling for the drugs to be brought under price control by the DPCO was an encouraging sign (MNC pharma companies have a higher percentage of drugs under price control as compared to their domestic counterparts). Going forward, while we are positive about the growth prospects of both domestic and MNC companies alike, we, nevertheless, advise investors to adopt a stock-specific approach while investing in the sector.

    To sum up...
    We believe that at the current levels, investors need to be selective with respect to their investments and need to invest in those stocks having reasonable valuations and strong fundamentals from a long-term perspective. While the 'India' story remains intact and the growth prospects of companies have been factored in, investors need to constantly ask themselves, especially at these levels, whether the investment in a particular stock is worth the price paid.



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