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In the last one month... - Views on News from Equitymaster
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  • Sep 28, 2006

    In the last one month...

    It has been an eventful September 2006, a month where the benchmark index, BSE-Sensex, for only the second time in India's stock market history, breached the coveted 12k mark and recorded a gain of 7% during the past one month. The other benchmark, the S&P Nifty was also not far behind and gained 6% during the same period. Quite impressive the gain might look, but there still remained certain companies that outperformed the benchmark indices by a decent shot. Let us have a look at the top five companies that gained the most among all the S&P Nifty companies.

    Emerging as front-runners are the two companies from the banking sector viz. Oriental Bank of Commerce and the private sector behemoth, ICICI Bank. While the former has gained a huge 32% during the month, good enough to qualify as top performer for the year, the latter was able to increase its market cap by 17%. In fact, such was the dominance of the banking sector that among the top 10 companies that gained the most during the last one month, 5 companies are from the banking sector. The optimism could be attributed to the toning down of fears regarding rise in interest rates and the consequent slowdown in credit growth. In fact if the industry pundits are to be believed, the verdict is split in favour of either further softening or stability in interest rates. A rise in interest rates forecast is nowhere in the picture. Little wonder investors are lapping up good quality banking stocks that had fallen out of favour in the not so recent past.

    Oriental Bank of Commerce is one of the few public sector banks that have the repute of being very proactive in maintaining asset quality among PSU banks. Moreover, speculation that the bank will enter into a three-way merger with Corporation and Indian bank is also helping veer investor interest towards the stock as this will give it adequate teeth to protect its turf in the fiercely competitive and rather fragmented Indian banking sector (but as mentioned, these are just speculation).

    Perched at number three and not far behind ICICI Bank in terms of gains over the last one month is Jet Airways, India's largest airline carrier. While a 16% gain in the past one month is indeed comforting, if the current price of Rs 651 is viewed against its listing price of Rs 1211, the equation turns on its head. The company is a classic case of what happens to even the smartest of companies when major headwinds build up in an industry. In fact, the much revered Benjamin Graham in his classic 'The Intelligent Investor' has gone to the extent of saying that airlines is one industry which has toted up accumulated losses in its entire history. Indeed, very little could be done when fixed costs are extremely high and competitors enter into an ugly price war. Couple this with sky rocketing input costs and you have a recipe for disaster. Thus, while the gains of the last one month could be attributed to softening of crude prices and some initiatives undertaken by the company to shore up its bottomline, we would rather sit on the sidelines and watch to what extent does this help the company.

    Occupying the final two spots with gains of 16% and 14% are Maruti and Hindustan Petroleum Corporation Ltd. (HPCL) respectively. Maruti, the country's largest passenger car manufacturer by a long shot has lined up aggressive capex plans to the tune of Rs 100 bn by 2010. Moreover, the parent Suzuki also plans to make the company its export hub. With rising prosperity and availability of cheap finance in the country, the investments could not have come at a more opportune time. It will however, have to be wary of competition that is targeting its sweet spot more aggressively than ever before. In our view, growth over the next two to three years, will come at the cost of margins.

    HPCL, one of India's leading oil refining and marketing company seems to be basking in the glory of falling crude prices. Besides, the optimism could also be attributed to capacity expansion plans where the company will significantly augment its refining capacity.

    With the exception of Jet Airways, all the companies (indices included) are trading quite closer to their 52 week highs although the valuations are not as high as back then since most of them have reported robust 1QFY07 numbers. Having said that, they still don't come cheap as far as medium term growth is concerned. Thus, if anyone looking to invest at current levels should look for a longer time horizon and should incorporate an appropriate margin of safety to protect him from limiting his downside as it is one thing which cannot be completely eliminated!



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