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No stopping the bulls!

Sep 23, 2006

The past week was one of further consolidation by the bulls, even as the benchmark BSE-Sensex continues to inch upwards, getting ever closer to its all-time high levels hit in May this year. On an absolute basis, the BSE Sensex gained 1.9% for the week, while the corresponding figure for the NSE-Nifty was also 1.9%. However, like the previous week, there was some amount of volatility this week as well, with the markets on various occasions swinging to and fro. On Monday, the markets saw a continuation of the strong trend seen in the previous week, as the major indices opened on a firm footing. This was aided by strong global markets as well. While the indices did lose some ground during the course of the day, they largely managed to sustain the gains towards the close. Tuesday, on the other hand, witnessed a volatile trading session, as participants appeared to have chosen to take some profits off the table. The caution was also seemingly a result of concerns about further rate hikes in the US. Wednesday, on the other hand, saw a continuation of the cautious trend seen on Tuesday, as rate hike worries as well as a political coup in a neighbouring Southeast Asian country subdued sentiment. However, as trade progressed, the markets brushed aside these concerns and participants resorted to frenzied buying towards the close, resulting in a positive day for the indices.

Come Thursday, the markets soared upwards, buoyed by the US Fed's decision to keep interest rates steady for the second time in succession, and continued weakness in crude oil prices. The Sensex gained as many as 165 points on Thursday, clearly by far the best trading session of the week. However, on Friday, the markets broke off from the bullish trend, as participants opted to take some profits home ahead of the weekend.

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 19.6 bn. Domestic mutual funds (MFs), on the other hand, turned out to be net sellers to the tune of Rs 325 m.

Net investments
(Rs m) FIIs MFs Total
15-Sep-06 4,916 (168) 4,748
18-Sep-06 4,590 (19) 4,571
19-Sep-06 4,951 638 5,589
20-Sep-06 2,767 (2,693) 74
21-Sep-06 2,360 1,916 4,276
Total 19,584 (325) 19,259

The benchmark index, the BSE Sensex, closed higher during the last week by 1.9%, while the NSE Nifty also gained 1.9%. As regards sectoral indices, the BSE FMCG index proved to be the biggest gainer during the last week, notching up 2.6% gains. With the 'Great Indian Middle Class' getting more affluent, and the consumption story being played out supported by favourable demographics, the FMCG sector appears set for exciting times ahead. The BSE IT index also gained 1.5% last week, as the overall bullish trend was seen in this sector as well. With the offshoring story becoming more mainstream, we expect software companies, specially the top-tier companies, to be the major beneficiaries. The BSE Oil & Gas index gained 1.2% in the previous week, aided by continued weakness in crude oil prices. Apart from this, the other indices also managed to gain some ground, with the exception of the BSE Metal index, which lost a marginal 0.1%, and the BSE Midcap index, which lost 0.6%.

Key indices over the week
Index As on September 15 As on September 22 % Change
BSE AUTO 5,198 5,215 0.3%
BSE BANKEX 5,642 5,679 0.7%
BSE FMCG 2,009 2,062 2.6%
BSE HEALTHCARE 3,597 3,618 0.6%
BSE IT 4,330 4,394 1.5%
BSE METAL 8,223 8,213 -0.1%
BSE OIL&GAS 5,716 5,785 1.2%
BSE PSU 5,679 5,709 0.5%
BSE MIDCAP 5,035 5,007 -0.6%
BSE SMLCAP 5,986 6,016 0.5%

Having looked at the institutional activity and the movement in key indices in the last week, let us consider some sector/stock specific developments:

  • Wind energy major, Suzlon Energy has announced that Suzlon Wind Energy Corp, USA, the 100% subsidiary of Suzlon Energy A/S, Denmark, has signed an agreement with John Deere Wind Energy to supply 247 MW of wind turbines. The delivery will take place throughout the year 2007. The order is worth Rs 11 bn. With this, the company has a current consolidated order book position of Rs 58 bn, with Rs 50 bn in international orders and Rs 8 bn in domestic orders. Suzlon is in the process of expanding its manufacturing footprint globally and this deal is in line with its strategy. The stock closed the week higher by 7.1%. Other engineering stocks.

  • According to a leading business daily, Reliance Petroleum (RPL), a refining company of RIL, has decided to raise funds aggregating US$ 3 bn, of which US$ 1.5 bn will be through the external commercial borrowings (ECB) route and the remaining 50% by way of export credit. The company will deploy these funds for it's new 29 m tonne per annum refinery in the State of Gujarat. The company also plans to start the operations of its refinery from June 2008, against the predetermined start-up time in December 2008. Thus, the superior execution skills of the management will help the company to start the company before hand. The stock closed 2.2% higher week-on-week. Other energy stocks.

    Top gainers during the week (BSE-A)
    COMPANY Price on Sept 15 (Rs) Price on Sept 22 (Rs) % CHANGE 52-WEEK H/L (Rs)
    BSE-SENSEX 12,010 12,237 1.9% 12,671 / 7,656
    S&P CNX NIFTY 3,479 3,544 1.9% 3,774 / 2,307
    DENA BANK 29 33 13.8% 42 / 20
    ORIENTAL BANK 227 252 11.1% 297 / 139
    GEOMETRIC SOFT 99 110 11.0% 135 / 73
    DREDGING CORP 518 568 9.6% 749 / 460
    BOM DYEING 673 735 9.2% 989 / 260

  • As per a leading business daily, Maruti has entered into an alliance with Magma Leasing for financing of Maruti cars in all price segments across the country. Magma has a significant presence in the rural and semi-urban markets and this alliance is expected to be beneficial to Maruti, which is also looking to capitalise on opportunities in these regions. Magma has a strong presence in the north and the south, which are also the biggest markets for Maruti. It must be noted that Maruti, apart from its own 68 offices in 16 States, has presence in over 1,000 marketing clusters through channel partners. The company also claims to capitalise on the large untapped potential of first-time car buyers in the domestic market. The stock closed the week lower by 1.3%. Other auto stocks.

    Top losers during the week (BSE-A)
    COMPANY Price on Sept 15 (Rs) Price on Sept 22 (Rs) % CHANGE 52-WEEK H/L (Rs)
    STERL. BIOTECH 105 92 -12.7% 173 / 87
    HINDUJA TMT 576 526 -8.7% 867 / 315
    CHENNAI PETRO 231 211 -8.7% 281 / 143
    EIH LTD. 111 102 -8.4% 127 / 53
    EXIDE INDUSTRIES 44 41 -7.8% 49 / 19

  • As per a leading business daily, Geometric Software is close to acquiring an engineering software services firm in Canada. The size of the deal has been pegged at US$ 40 m. By acquiring this company, Geometric is looking to increase its revenues from US$ 50 m in FY06 to US$ 100 m in FY07. While Geometric operates in the highly niche area of providing product lifecycle management (PLM) services, the company is focusing more on the engineering services (ES) space as a method of de-risking its revenues away from PLM services. While the growth potential is significant, it must be noted that this business is more people-intensive and linear in terms of growth (requires more people to generate additional revenues), and there is significant competition from TCS, Infosys, Wipro, Satyam and HCL Tech. The stock closed the week higher by as much as 11.0%. Other software stocks.

The BSE Sensex now trades at a price-to-earnings multiple of around 21.1 times its trailing 12-month earnings. At such valuations, it must be said that little value can be found. On an overall basis, it clearly seems that the current valuations adequately factor in growth prospects for the short-to-medium term. It should be noted that the Sensex is now just 434 points away from its all-time high levels hit in May this year.

Our view at the current levels is that investors need to be cautious. Buying opportunities have reduced, and this is particularly true in the large caps. The valuation gap between the large caps and mid-caps has increased, and this, we believe, is a clear opportunity to get into strong, quality mid-cap stocks with sound business models and fundamentals. We believe that the upcoming 2QFY07 results season will dictate the near-term trend of the indices. Negative surprises could lead to a possible correction, and we believe that any positive surprises have more or less been factored in.

We continue to advocate a long-term view on stocks, particularly at these levels. There is a clear need for investors to critically examine their portfolios at this stage, and watch out for any unjustified valuations. As we have always advised, do a detailed and dispassionate study of the fundamentals of the companies before investing, and invest for the long-term in order to enable your money to grow. Happy Investing!

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