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Correction blip or…? - Views on News from Equitymaster
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  • Sep 25, 2004

    Correction blip or…?

    This week’s trade on the Indian bourses seemed largely in the nature of some consolidation considering the smart rally that has been witnessed over the past few weeks. Investors, this week, preferred to book some profits at higher levels, which kept the indices in a narrow range, finally closing the week with about 0.6% losses.

    The indices had a rather subdued start to this week, as investors opted to exercise caution post the near 4% gains witnessed last week. However, this dullness was not to last long as after Monday’s lacklustre trading, investors continued their buying spree. Buying across the board pushed the Sensex beyond the 5,600 levels on Tuesday, which was sustained even on Wednesday. The euphoria was, however, followed by some profit booking at higher levels on the back of unfavorable news on the global crude oil front and domestic inflation front. It must be noted here that there has been no real trigger that could be credited for the sharp rally witnessed over the past 3-4 months, though valuations (then and now) continue to remain compelling over a long-term horizon. Investors, more so the FII community, seem to be thinking on similar terms as is evident from the near Rs 50 bn pumped in by them over the last 3 months into Indian equities.

    The big and the most awaited news this week was the Federal Reserve’s stance on US interest rates, which were raised by 25 basis points (0.25%) to 1.75%. The Fed Committee, while maintaining a positive outlook towards US economic growth stated that the upside and downside risks to the attainment of sustainable growth and price stability for the next few quarters remains to be roughly equal. We feel that this hike in interest rates could be of some concern to Indian stock markets as the FII money, which has been the lifeline of the rally since early 2003, could change course back to the US. This is because the case for India is not just based on long-term growth prospects but also the relative attractiveness (for a given level of risk, if US becomes more attractive than India, institutional investors could pare their exposure to India). However, we reckon this to be only a temporary phenomenon as the Indian growth story continues to be enthusing.

    Among the other news on the bourses, 3 new stocks got listed on the bourses on Friday – Indiabulls, Crew BOS and Sah Petroleum. While the first two stocks closed with 25% and 35% premiums respectively on their debut, Sah Petroleum ended the day at a 5% discount to its offer price. Staying with IPOs, the much-awaited NTPC issue is slated to hit the bourses around Diwali (second week of November). It must be noted that the NTPC public issue, which has been priced in the Rs 52-62 band, will be open from October 7 to October 14 for which the road shows have already begun. We will soon put up a detailed analysis of the IPO on our website.

    Among other corporate developments, pharma stocks remained active during the week with buying witnessed across both, large-caps as well as mid-caps. The biggest gainer in this pack was Glenmark Pharma (up 27%), which has out-licensed its anti-asthma NCE (new chemical entity) to Forest Laboratories (US) for an upfront payment of US$ 10 m. The company will also receive milestone payments and will receive royalties when the drug hits the market. Among others, while the optimism towards the Sun Pharma stock (see table below) was seemingly owing to the news of its acquisition of three new drugs, gains in Cipla continued on the back of a positive outlook towards the company. However, next week, pharma stocks could remain volatile considering the Ministry of Chemicals and Fertilisers stance towards controlling the pricing of drugs.

    Key gainers over the week (NSE-50)
    Company Price on
    Sept 17 (Rs)
    Price on
    Sept 24 (Rs)
    H/L (Rs)
    BSE-SENSEX 5,561 5,528 -0.6% 6,250 / 4,228
    S&P CNX NIFTY 1,734 1,723 -0.6% 2,015 / 1,292
    ICICI BANK 275 292 6.2% 352 / 190
    CIPLA 271 286 5.7% 289 / 192
    BAJAJ AUTO 940 991 5.4% 1,210 / 720
    SUN PHARMA 401 417 3.9% 427 / 218
    IND. HOTEL 425 441 3.9% 492 / 246
    Note: Click on the link above to read our latest view on the company/sector.

    Among the top losers this week were Zee Tele and BPCL. While concerns over the awarding of the BCCI cricket telecast rights (the case is pending in the Supreme Court) continue to haunt the Zee Tele stock, rising crude prices adversely affected the BPCL stock. It must be noted that since BPCL cannot pass on the rise in crude prices (its raw material) to the consumers, its margins are likely to come under pressure if petroleum product prices are not raised. However, with the inflation near 8% levels, it is highly unlikely that the government would allow the oil marketing companies to raise prices. HPCL also lost 2% during the week.

    Key losers over the week (NSE-50)
    Company Price on
    Sept 17 (Rs)
    Price on
    Sept 24 (Rs)
    % Change 52-Week
    H/L (Rs)
    GRASIM 1,195 1,120 -6.3% 1,317 / 582
    BPCL 372 350 -5.7% 533 / 230
    INFOSYS 1,690 1,614 -4.5% 1,712 / 928
    HLL 126 120 -4.2% 245 / 101
    ZEE TELE 157 150 -4.0% 175 / 100
    Note: Click on the link above to read our latest view on the company/sector.

    Apart from profit booking at higher levels, the party poopers this week seemed to be crude prices and inflation. While crude prices once again inched towards the US$ 49 per barrel mark, domestic inflation was higher than last week’s 7.81%, at 7.87%. It must be noted that, going forward, both these issues are potential threats to the sustenance of global economic growth, including India as these would lead to an imminent rise in interest rates affecting corporate profitability. Nonetheless, over the long-term, equities are likely to remain amongst the best performing asset classes, albeit with a higher risk component. However, a staggered investment approach with focus on only fundamentally sound companies would be the apt strategy for enhancing the returns from one’s portfolio. Happy investing!



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