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Up, up and away!

Oct 1, 2005

Markets are full of surprises. This was proved once again this week with the markets taking investors aback with its stupendous rise. In fact, this week's gain, 5% for the BSE-Sensex and the NSE-Nifty, is one of the biggest gains in this bull run, which started in May 2003. The buying was largely broad based with mid-cap stocks also performing despite the bear carnage of last week. The BSE Midcap Index closed higher by over 4% this week. However, small-cap stocks (index up 1.6%) continued to largely remain beaten down.

Despite the horrendous correction of last week that saw the Sensex lose almost 300 points within a couple of trading sessions, markets opened on Monday with sheer optimism. The markets traded rock solid for the entire trading session on Monday and by close, logged in one of the steepest single-day rise in recent history of the Indian stockmarkets, thus covering almost the entire losses. Further, the buying action was not restricted to large caps alone. The mid-cap and small-cap stocks (again!) also witnessed hectic buying interest. This was evident from the fact that while the Sensex closed higher by about 3%, the BSE Mid-cap Index and BSE Small-cap Index logged in gains of about 3.5% and 5% respectively!

What seem to have had aided investor optimism on Monday were the comforting words by the government (read Finance Minister) and the stock market regulator, Securities and Exchange Board of India (SEBI). While the FM re-iterated his stand on the strong prospects of the Indian economy going forward, there were reports that SEBI is contemplating reviving the Stock Borrowing & Lending Mechanism (SBLM) (a modified version of the old badla system).

The euphoria continued well into Tuesday and then Wednesday's and then Thursday's trading session. Though there was selling pressure witnessed at every rise, the bulls continued to march ahead breaking their lifetime highs in the process and creating new ones along the way. While during Tuesday's trade, the Sensex missed the 8,600 mark by a small margin; this level was breached convincingly in Wednesday's trade. However, the party did not end here as Thursday witnessed the Sensex breaching the 8,700 levels to almost everyone's amazement and utter disbelief of the skeptics who have been predicting a correction since the last 1,000 points (some even form the last 1,500 points) on the back of fair/stretched valuations. Further, though there was a significant intra-day correction witnessed on Friday, the bulls were quick to begin bottom fishing and the markets finally closed with only marginal losses.

Thus, at the end of this all, the week witnessed the Sensex register gains of 5%, one of the biggest gains since the bulls started to take control of the Indian bourses. Just to put this in perspective, while this week's gain was the largest in 2005, it is the second best since January 2004 and takes the third spot if we consider this from May 2003. Now that's some feat, especially considering that the markets are at their historic highs with not-so-cheap valuations. Further, this weeks rally was largely supported by the non-institutional players and domestic mutual funds (Rs 8 bn) while Foreign Institutional Investors (FIIs) were net buyers of equities only to the tune of Rs 3 bn.

Top gainers over the week
CompanyPrice on
Sept 23 (Rs)
Price on
Sept 30 (Rs)
H/L (Rs)
BSE-SENSEX 8,223 8,634 5.0% 8,522 / 5,428
S&P CNX NIFTY 2,478 2,601 5.0% 2,586 / 1,696
IPCL207 236 14.1%238 / 156
Tata Power430 481 11.8% 496 / 287
BHEL1,100 1,224 11.3% 1240 / 532
L&T1,373 1,519 10.7% 1599 / 790
Guj. Ambuja 70 77 10.5% 78 /42

Now let us consider some sector/stock specific developments this week:

  • Bharti Televentures will be investing Rs 2.5 bn for expanding its Airtel GSM network in Maharashtra and Goa for FY06. The company plans to capture 550 towns and 13 highways by the end of the fiscal. This move by the telecom major is inline with the company's strategy to have the largest footprint in the 2 states. Further, the company has achieved its targets of 1 m fixed line subscribers in the month of September 2005. It should be noted that the company has outlined an expansion programme involving a capital outlay of Rs 15 bn for FY06 to improve on its fixed line network and increase its reach. This move assumes significance, as there exists huge potential in the fixed line arena (especially in the rural India). The stock ended the week higher by 3%. Other telecom stocks

  • Maruti, the largest car manufacturer in the country, is planning to raise prices of some of its offerings effective October 1, 2005. While the quantum of price hike has not been revealed as yet, the hike is in wake of the 4% to 5% increase in freight charges post the diesel price hike announced in the current month. This move will enable the company to pass on some burden of rising costs of manufacturing a vehicle and thereby protect its margins to some extent. Also, the company is set to launch a new version of its 'Baleno' model with a few added features as well as a new price tag. This move by the company is a positive, as its presence in the segment was only namesake since the car did not manage to woo customers due to its outdated and boxy looks. The stock ended the week firm, up 2%. Other auto stocks

    Top losers over the week
    CompanyPrice on
    Sept 23 (Rs)
    Price on
    Sept 30 (Rs)
    H/L (Rs)
    ZEE Tele181 173 -4.5% 206 / 128
    Grasim1,342 1,322 -1.5% 1415 / 1010
    Tata Tea846 841 -0.6% 880 / 405
    ITC138 137 -0.6% 149 / 71
    Ranbaxy494 492 -0.5% 640 / 435

  • Larsen and Toubro (L&T), India's largest engineering company, has bagged a contract from Petroleum Development Oman LLC (PDO) for Rs 1.7 bn. The deliverables include revamping and upgradation of the transmission lines and substations in PDO's existing oil fields in Central Oman. The contract is scheduled to be completed by February 2007. This order win is clearly in line with L&T's strategy of bidding for more complex projects with higher margins, rather than infrastructure engineering projects, where the company earns lower margins than average. The stock was in considerable limelight this week as it ended the week with 10% gains. Other engineering stocks

  • M&M, the fourth largest tractor manufacturer in the world is planning to set up manufacturing facilities in Russia and Malaysia for utility vehicles. While the company has not yet decided the time frame for the Russian market, it expects the Malaysian plant to be operational within a period of 12 to 15 months. It should be noted that the company is already exporting its 'Scorpio' to these markets. This move will give a major fillip to the export plans of M&M in these markets. It appears that completely knocked down (CKD) kits of Scorpio would be imported from India and assembled in these overseas facilities as has been the case of the its subsidiary in Africa. M&M's stock notched 8% gains this week. Other auto stocks

  • Demand for cement from local and regional markets is set to increase on account of heavy rains and floods and restructuring of infrastructure thereafter. As a result, current cement prices, which are in the range of Rs 160 to Rs 175 per bag, are expected to increase by Rs 5 per bag from October 1 this year. It must be noted that construction activities are slow during the rains and pick up pace once the monsoon ends. With the monsoons now nearing the end, cement producers are expected to raise cement prices. This augurs well for cement players. Cement stocks this week

With this week's gains, the Sensex is currently trading at almost 18 times its trailing 12-month earnings, which is by no means attractive. In fact, we believe that it is over-valued in the short-term as much of the FY06 growth seems to be already priced in. Further, as we enter the results season, it must be noted that there is seemingly significant optimism with regards to India Inc.'s September quarter performance, which if fails to meet investors' expectations, could pose some problem for the markets. This is because the current valuations do not leave much margin of safety and any falter on the deliverables by India Inc. would not go down well with the markets. We would continue to advise utmost caution at these levels. Happy and safe investing!

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