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The bulls march on! - Views on News from Equitymaster
 
 
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  • Sep 30, 2006

    The bulls march on!

    The previous week saw the Indian indices continuing to gain further ground, as sentiment continued to remain positive, amid signs of cooling crude oil prices, the likelihood of the US Fed continuing to let interest rates remain at current levels and strong 1QFY07 GDP growth numbers reported towards the end of the week. The BSE-Sensex managed to gain 1.8% for the week, while the NSE-Nifty added around 1.3%. There were sessions where some amount of volatility was witnessed, as can be expected when the indices are nearing their all-time high levels. In fact, the BSE Sensex is now just 217 points away from its all-time high hit in May this year.

    As regards the trade for the week, on Monday, the markets traded fairly subdued, as participants appeared unwilling to take any fresh positions after the strong gains seen since mid-June. Intra-day volatility was high, as the indices swung either side of last Friday's closing levels, before finally losing ground and closing well in the red. Tuesday, however, was a different story altogether, as the indices surged higher, albeit after trading subdued for a large part of the day, as participants opted to buy at lower levels. Wednesday's session saw a continuation of the strong trend seen on Tuesday, as sentiment remained upbeat, following positive economic reports and stability in interest rates. However, towards the close, profit booking at higher levels led to the indices giving up most of their gains, even as they closed in the positive.

    On Thursday, the markets witnessed a volatile session, as the major indices moved higher and lower alternatively, compared to Wednesday's closing levels. The final close was only marginally in the positive. Friday, however, saw a positive trend in the indices, as participants opted to buy stocks after being witness to the recent volatility. Even as the opening was largely subdued, as the day wore on, buying at lower levels led to the major indices gaining significant ground, closing well in the positive.

    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 11.9 bn. Domestic mutual funds (MFs) also turned out to be net buyers to the tune of Rs 7.5 bn.

    Net investments
    (Rs m) FIIs MFs Total
    22-Sep-06 1,521 (1,353) 168
    25-Sep-06 (2,685) 2,240 (445)
    26-Sep-06 349 4,685 5,034
    27-Sep-06 5,550 (1,155) 4,395
    28-Sep-06 7,195 3,087 10,282
    Total 11,930 7,504 19,434

    BSE Sensex, the benchmark index, closed higher during the last week by 1.8%, while the NSE Nifty gained 1.3%. As regards sectoral indices, the BSE Bankex proved to be the biggest gainer during the last week, notching up gains of as much as 6.3%. This follows an improved outlook for the sector going forward, with interest rates now seemingly on stable ground. If interest rates are kept stable, this would not lead to a slowdown in credit offtake, thus stimulating investments in the economy and keeping inflation in check as well. The BSE Metal index was the other big gainer for the week, adding 3.6%, while the BSE Auto index also managed to gain 2.9%. Other indices also added ground, while the BSE IT index was the only one to end little changed. As regards the BSE Mid Cap and BSE Small Cap indices, these added 2.8% and 2.4% respectively, signifying that the overall breadth in the markets this week was strong.

    Key indices over the week
    Index As on September 22 As on September 29 % Change
    BSE AUTO 5,215 5,366 2.9%
    BSE BANKEX 5,679 6,039 6.3%
    BSE FMCG 2,062 2,066 0.2%
    BSE HEALTHCARE 3,618 3,684 1.8%
    BSE IT 4,394 4,394 0.0%
    BSE METAL 8,213 8,509 3.6%
    BSE OIL&GAS 5,785 5,803 0.3%
    BSE PSU 5,709 5,816 1.9%
    BSE MIDCAP 5,007 5,148 2.8%
    BSE SMLCAP 6,016 6,162 2.4%

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

    • NIIT Limited, India's premier IT training company, has announced its entry into training for the financial services sector with the launch of the Institute of Finance, Banking and Insurance (IFBI) in partnership with ICICI Bank. IFBI, offering a six-month full-time programme in Post-Graduate Diploma in Banking Operations, will focus on grooming entry-level professionals for the banking industry. ICICI Bank has offered to recruit all students of the first batch as officers upon completion of the programme. The banking industry currently employs 0.9 m people and is expected to grow this number to 1.5 m over the next five years. This translates into an additional requirement of 0.6 m professionals with skill sets in this segment. The training programmes will be offered from IFBI education centres set up in Delhi, Mumbai, Chennai, Bangalore, Hyderabad and Kolkata. The objective is to leverage its strong training expertise and utilise this in newer verticals. The company expects these new businesses (including NIIT Imperia and Litmus) to contribute around 15% of its revenues by FY09. The stock gained 2.6% for the week. Other software stocks.

    • The telecom regulator, TRAI, has set a base price ranging between Rs 150 m and Rs 800 m per circle (depending upon commercial importance) for operators seeking to bid for 3G spectrum. Similarly, a base price between Rs 20 m and Rs 100 m has been set for wireless broadband spectrum (Wi-max, Wi-fi). Over and above this, operators will also have to pay the amount quoted by them during the auction, plus spectrum charges amounting to 1% of their annual revenues from the second year of operations. There will be an auction process for the spectrum. As regards the different frequency bands, as per TRAI's proposal, 5 operators will be accommodated in the 2.1 GHz band, one in the 450 MHz band and 2 in the 800 MHz band, with the latter 2 bands being reserved for CDMA operators. However, it should be noted that globally, only 10% of the total wireless base is 3G, and also, given the relatively higher costs of rolling our 3G services, these services are unlikely to come cheap to the consumer. Given other factors like complex handsets, the higher costs of such handsets and the fact that 3G is predominantly an urban phenomenon, the probability of wide adoption of 3G appears unlikely over the next few years at least. Other telecom stocks.

      Top gainers during the week (BSE-A)
      Company Price on
      Sept 22 (Rs)
      Price on
      Sept 29 (Rs)
      %
      Change
      52-Week
      H/L (Rs)
      BSE-SENSEX 12,237 12,454 1.8% 12,671 / 7,656
      S&P CNX NIFTY 3,544 3,588 1.3% 3,774 / 2,307
      STERLING BIOTECH 92 145 58.4% 165 / 87
      ALSTOM PROJECTS 294 351 19.2% 442 / 162
      MIRC ELEC. 21 25 18.8% 25 / 14
      SYNDICATE BANK 77 90 16.8% 104 / 47
      J&K BANK 394 448 13.8% 564 / 306

    • Tractor and UV major, M&M, will be acquiring a 67.9% stake in Jeco Holding AG, a German forging company, at an enterprise value of Rs 8.3 bn. The company will be acquired through the Mauritius subsidiary of M&M and will be subsequently integrated with Mahindra Automotive Steels Limited (MASL). Jeco is focussed on the truck, bus and trailer markets, and has the capacity to produce around 100,000 tonnes forgings per annum, with a turnover of 180 m Euros. The company's top client list reads impressively, with big-ticket names such as DaimlerChrysler, Volvo and Renault adorning it. The company is a profitable one, as reported by M&M company sources. This move will help M&M to create a globally scalable auto components business, which is part of the company's long-term plans. The stock closed higher by 3.8% week-on-week. Other auto stocks.

      Top losers during the week (BSE-A)
      Company Price on
      Sept 22 (Rs)
      Price on
      Sept 29 (Rs)
      %
      Change
      52-Week
      H/L (Rs)
      GTL LIMITED 164 138 -15.7% 181 / 96
      VOLTAS 111 104 -6.8% 115 / 40
      WELSPUN GUJ. 76 71 -5.7% 113 / 47
      RAMCO SYSTEMS 186 176 -5.0% 475 / 142
      J.B.CHEMICALS 98 94 -4.4% 140 / 74

    • The long delayed project of HPCL will finally see the light of the day with the company offering 25% stake in its Bhatinda refinery-cum-pipeline project to Oil India Ltd (OIL). HPCL has failed to woo big companies like BP, Saudi Aramco and Exxon to become its partner in the project. OIL has to inject Rs 15 bn in order to pick up the stake. The 9 m tonne per annum (mtpa) refinery project will cost Rs 141.4 bn and the 1,011 km crude oil pipeline which will be laid from Mundra port in Gujarat to the inland refinery located in Bhatinda (Punjab) will cost around Rs 37.9 bn. Being an inland landlocked refinery, the products can only be sold in the nearby regions owing to cost of transportation. The stock closed the week with 3.5% losses. Other energy sources.

    The BSE Sensex now trades at a price-to-earnings multiple of around 21.3 times its trailing 12-month earnings. This is not cheap by any standards of evaluation, and particularly when compared to its historical valuations, which are in the range of 14 to 16 times earnings. Clearly, India is the most expensive emerging market globally, although it must also be said that given the superior quality of growth, better corporate governance practices and stronger return ratios, apart from stronger growth prospects, there is a case for justifying the higher valuations enjoyed by Indian stocks vis--vis their emerging market peers. However, despite these factors, we would remain cautious at the current levels, purely on valuations. It should be noted that the Sensex is now just 217 points away from its all-time high level of 12,671 hit in May this year.

    With the 2QFY07 results season fast coming upon us, this is one event that needs to be carefully watched, analysed and debated over the next few weeks. Any negative surprises on this front could lead to a correction, which would not be a bad thing in our view, as healthy corrections are an intrinsic part of any bull market. We believe that there is a clear opportunity to get into strong, quality mid-cap stocks with sound business models and fundamentals for the long-term.

    Overall, as has been the case over the past few weeks now, we continue to advocate a long-term view on stocks, particularly at these levels. Investors must critically examine their portfolios and take a call on whether valuations are getting out of hand. 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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