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Stock markets: The month that was

Oct 7, 2004

While there seems to be a fair sprinkling of pessimism over the fate of the global economy owing to record high crude prices and the threat of inflation arising from it, the Indian stock markets appear to be the proverbial paradox. Riding on the back of expectations of another round of strong quarterly results and more recently, a robust 7.4% GDP growth during 1QFY05, the benchmark indices have shrugged the twin demons of inflation and crude prices and have pocketed a cool 9% gain over the past one month. However, not all Sensex stocks have risen by the same rate and some of them have outperformed the index by a considerable margin. In this article, let us have a look at the top five gainers on the Sensex in the past one month and see whether the buoyancy is justified or not.

 3-Sept'046-Oct'04% change
Sensex 5,246 5,722 9.1%
Nifty 1,644 1,795 9.2%
Cipla23628821.6%
HDFC56766817.8%
Tata Steel25329014.7%
Reliance47754714.7%
HLL11212713.6%

Cipla: Leading the brigade with an impressive 22% gain is Cipla, the newly anointed number one pharma company in the domestic markets. It has caught the investor's fancy in recent times owing to the consistency in its growth and margins over the last few quarters. On the other hand, rivals like Ranbaxy and Dr Reddy's have grown at a much lower rate on account of differences in their business models. While the latter two rely more on generics business in regulated markets, Cipla is focused on formulation sales in the unregulated markets and also employs a low risk strategy of partnering with generics major in US for supply of bulk drugs. Hence, there is a greater visibility to the company's revenues. However, over the long-term, we believe that Cipla's profitability might get hurt because of its dependence on bulk drugs, entry barriers to which are pretty low. Hence, the low cost expertise that Cipla currently enjoys will not be too difficult to replicate.

HDFC: With gains of 17%, HDFC, India's largest housing finance company occupies the second spot. Owing to uncertainty over interest rates, the stock had shown little movement during the early part of the year. But with demand for housing loans continuing to remain robust, the stock seems to have come right back into contention. With housing loan disbursals expected to grow in the region of 25% over the next few years on account of significant shortfall in dwelling units, this presents a great opportunity for a quality player like HDFC. Moreover, its investments in companies such as HDFC Bank and HDFC Standard Life Insurance is likely to hold it in good stead going forward.

Tata Steel: The company, which is one of the world's low cost steel producers, is the third highest gainer on the bourses (15% over the last one month). With metal prices once again threatening to reach record highs, investors seem to be making a beeline for the stock. Moreover, the company recently acquired Natsteel, a Singapore based steel company, which is likely to give Tisco an opportunity to further diversify and service select South East Asian markets. Having said that, we would urge the investors to be circumspect at these levels, as the risk return ratio currently seems skewed towards risk.

Reliance: India's leading private sector player has gained nearly 15% in the last one month. The optimism could be attributed to the uptrend in the petrochemical cycle, which has led to increase in prices, a positive for an integrated player like Reliance. Besides, there has been no significant capacity addition in recent past as well. Moreover, the company's other investments in telecom businesses and exploration projects are also a positive.

HLL: The FMCG major is the fifth highest gainer on the bourses over the last one month. FMCG stocks were not exactly hot property in the recent bull rally. Demand in rural areas, which was expected to pick up post favorable monsoons in FY03, did not exactly materialize. Moreover, with archrival P&G slashing detergent prices by half, the company had to follow suit and this made the going even tougher for the company. However, recently, both the companies revisited their strategy and have raised prices. However, we believe that though the company may be able to tide over the short-term pricing blues, margins are unlikely to reach the past highs.

Having looked at the top five gainers and the overall market sentiment over the past one month, we feel that one has to exercise caution at current levels. Although, the fundamentals are good, some stocks seem to have run ahead of their valuations and hence, have started looking expensive even from a medium term perspective.

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