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Flush with liquidity... - Views on News from Equitymaster
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  • Sep 22, 2007

    Flush with liquidity...

    The bulls were back with a bang as the domestic indices gained nearly 6% during the week ended 21st September, closing at an all-time new high. The global rally was triggered by a larger than expected interest rate cut by Fed.

    The week began on a shaky note with the BSE-Sensex closing 100 points lower, inspite of a firm start. The bulls, however, managed to wrest control from the bears on Tuesday, as the domestic indices advanced more than 1%. The US Fed, on Tuesday, cut its benchmark rate by 50 basis points, for the first time in four years, to 4.75%. The larger than expected cut in interest rates resulted in a strong rally across the globe. The BSE Sensex closed the day with its biggest-ever single day gain (in absolute terms), breaking past the 16,000 mark in the process. The rally was led by auto, banking, energy and steel stocks. Infact the BSE Oil & Gas Index and the BSE Bankex advanced by 5% and 4.8% respectively. The markets extended their gains on Thursday (0.2%) and Friday (1.3%), with the BSE Sensex closing the week with a gain of nearly 6%.

    On the institutional activity front, between 7th and 13th September, while Foreign Institutional Investors (FIIs) emerged as net buyers to the tune of Rs 49 bn, mutual funds sold equities worth Rs 2 bn.

    (Rs m) MFs FIIs Total
    14-Sep (2,156) 11,594 9,438
    17-Sep (2,036) (2,674) (4,710)
    18-Sep (190) (1,375) (1,565)
    19-Sep 4,912 24,845 29,757
    20-Sep (2,334) 16,295 13,961
    Total (1,804) 48,685 46,881

    On the sectoral indices front, the BSE Oil & Gas Index and the BSE Bankex Index ended the week with a gain of 11.4% and 7.4% respectively, while the BSE Infotech Index emerged as the key loser (down 0.5%).

    Index As on September 14 As on September 21 % Change
    BSE IT 4,449 4,428 -0.5%
    BSE SMLCAP 8,573 8,895 3.8%
    BSE OIL AND GAS 8,387 9,340 11.4%
    BSE HEALTHCARE 3,666 3,654 -0.3%
    BSE AUTO 4,885 5,194 6.3%
    BSE PSU 7,300 7,781 6.6%
    BSE MIDCAP 6,897 7,200 4.4%
    BSE FMCG 2,073 2,153 3.9%
    BSE BANKEX 8,136 8,740 7.4%
    BSE METAL 11,980 12,813 7.0%

    Now let us have a look at some of the key stock/sector specific developments during the week:

    Engineering stocks closed firm for the week with Siemens (up 10%), L&T, Punj Lloyd, Thermax, Suzlon, Cummins India and ABB (up 7% each) featuring among the top gainers. As per a leading business daily, L&T, in consortium with Outotec, Germany, has bagged a Rs 7.6 bn sinter plant order from SAIL. The order value for L&T is approximately Rs 6.4 bn and euro 22.1 m for Outotec. The new sinter plant with 3.8 MTPA capacity is to be executed at IISCO's Burnpur facility in West Bengal, and is part of SAIL's plan to expand capacity of crude steel by 2.5 mtpa. The project is to be completed in 29.5 months. Outotec's scope covers basic engineering, supply of proprietary and special equipment as well as technical services, while L&T's scope covers detail engineering, supply of indigenous mechanical, electrical and instrumentation works and complete site services including civil, structural and erection works. L&T along with Outotec is presently executing a 2.3 MTPA sinter plant at Tata Steel, Jamshedpur, which is nearing completion. The consortium has also received an order for a 5.75 MTPA sinter plant for Tata Steel's new Kalinganagar, Orissa unit.

    As per a leading business daily, Hotel Leela is planning a capital expenditure of Rs 22 bn for the next three years for developing hotel properties across the major cities in the country. An amount of Rs 11 bn has already been invested and the rest will come from internal accruals. In April, the company had raised US $100 m through a foreign currency convertible bond issue and had also raised US $60 m through a euro issue. It will be doubling its room count from the current 1,200. Further, it is also expanding the 'Club' concept at its hotels. These are like suites with exclusive swimming pools and plunge pools, within the hotel properties. About 20% of its space belongs to this 'Club' segment where the tariff is about 30 % higher than the regular room rates. This would help the company optimize on the current industry scenario, however it faces execution risk. While EIH lost 2%, Indian Hotels advanced by 2% during the week.

    Top gainers during the week (BSE A)
    Company Price on
    Sep 14 (Rs)
    Price on
    Sep 21 (Rs)
    H/L (Rs)
    BSE SENSEX 15,604 16,564 6.2% 16,617 / 12,145
    S&P CNX NIFTY 4,518 4,838 7.1% 4,856 / 3,507
    ENGINEERS INDIA 457 622 36.2% 673 / 430
    ADANI EXPORT 392 479 22.2% 488 / 123
    INDUSIND BANK 66 80 20.5% 82 / 37
    RAYMOND 271 320 17.9% 478 / 251
    ROLTA INDIA 446 523 17.3% 534 / 251

    Construction stocks were in the positive during the week with Nagarjuna Construction (up 12%), IVRCL (up 11%) and HCC (up 7%) leading the pack of gainers. The boom in the construction industry is proving to be a double-edged sword for companies in the sector. High demand for construction equipment coupled with a worldwide shortage has led to a sharp rise in hiring charges for such equipment. On an average, the cost of hiring has gone up by approximately 30% to 40% over the last two years. It has a definite impact on the business not only from the cost point of view, but also from timely availability of resource as well. While the cost of hiring has gone up across the board, the sharpest rise has been in cranes. The cost of hiring for specific construction equipment such as cranes has gone up to 35% of total hiring costs. Rentals for cranes are going up because requirement of cranes in the country has gone up dramatically and there is a shortage of cranes all over the world.

    Top losers during the week (BSE A)
    Company Price on
    Sep 14 (Rs)
    Price on
    Sep 21 (Rs)
    H/L (Rs)
    TORRENT PHARMA 207 184 -10.9% 198/181
    HEXAWARE TECH 133 125 -6.3% 126/122
    NIIT 163 155 -5.0% 163/153
    ESSEL PROPACK 63 60 -4.6% 61/59
    MPHASIS LTD. 281 268 -4.5% 278/263

    Markets are expected to be driven by liquidity in the near-term. Crude oil prices reached an all-time new high to at US$ 83 per barrel, but remained largely ignored by the markets. Another worrying factor remains the appreciating rupee, which sooner or later will impact exports. During the week, the Rupee hit a low of Rs 39.2 per Dollar, which is clearly on the back of strong FII flows. The appreciating rupee is yet another reason for the FIIs to be aggressive, and hence liquidity will be a major driving factor, (Thailand being a case in point). More than global worries, it is the expensive valuations that remain our cause of concern. Hence, we would advise our investors to concentrate on companies with strong fundamentals and good management that are likely to provide adequate returns on investment and not get swayed by the liquidity factor.



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