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Expectations build up…

Oct 9, 2004

It was yet another positive week for the Indian indices with the Sensex and the Nifty closing with gains of 1.5% and 2.3% respectively. Positive noises emanating from the Centre and strong expectations from the September quarter results that are round the corner, seemingly helped to sustain the air of optimism that has been prevailing on the bourses since the last 3-4 months. FIIs continued to lend their support to Indian equities and instill their faith in the Indian economy.

Backed by strong gains last week, especially the near 100-points rally witnessed by the Sensex on Friday, the Indian indices opened Monday with a bang. Setting aside initial concerns with respect to 463 'B' group stocks getting transferred to the trade-to-trade system on the bourses, the Indian stock markets rallied for the fourth consecutive trading session on Monday with the Sensex adding another 90 points. With this, the Sensex had gained about 300 points (nearly 6%) in just 4 trading sessions. Strong GDP growth numbers, tamed inflation levels (7.38%) and strong FII inflows on the back of expectations of a robust September quarter earnings season, all collectively led to a strong perk up in investor sentiments.

However, the rally on the bourses changed gears Tuesday onwards. Taking a break from the hugely exciting past few trading sessions, Tuesday's trading was rather lacklustre as the indices grappled to find a direction. This confused behaviour of the indices continued throughout the week (see chart above), which could be attributed to investors’ apprehensions regarding committing investments at index levels of over 5,700 levels (Sensex).

This is because, on one hand, there have been positive indications from the government with respect to tax reforms and FDI sops (including gradual raising of FDI limits in various sectors like telecom, insurance and aviation), and doing away with the distinction between FDI and FII investments. On the other hand, global cues with respect to rising oil prices (which are over US$ 53 per barrel) have kept investors’ sentiment under reign. Nonetheless, FIIs continued to pour in money into Indian equities with their net investments in the last three months being almost US$ 1.5 bn (see chart above).

Though the indices may not have behaved as euphoric as in the recent past, stock specific activity continued on the bourses as can be seen in the gainers’ and losers’ tables below.

Key gainers over the week (NSE-50)
COMPANY Price on Oct 1 (Rs) Price on Oct 9 (Rs) % CHANGE 52-WEEK H/L (Rs)
BSE-SENSEX 5,676 5,758 1.5% 6,250 / 4,228
S&P CNX NIFTY 1,775 1,818 2.4% 2,015 / 1,292
SHIP. CORP 144 176 22.3% 203 / 61
BHARTI TELE 143 154 7.6% 189 / 70
SAIL 47 51 6.9% 56 / 21
HDFC 629 672 6.9% 700 / 450
BHEL 585 623 6.6% 685 / 375
Note: Click on the link above to read our view on the company/sector

Shipping stocks were particularly in the limelight during the week with the biggest gainer being Shipping Corporation of India (20%). The optimism towards the sector in recent times could be attributed to the firming up of freight rates in the last 4-5 weeks on the back of increased demand for petroleum products, especially from the East Asian countries. Just to put things in perspective, tanker rates like those of Aframax and VLCC have increased in the region of about 40%-70%. This would seemingly lead to better earnings for shipping majors and hence the investor interest. Shipping stocks over the week

Steel stocks also continued their rally on the back of expectations of robust September quarter results. It must be noted that steel demand and, consequently, prices have failed to show any signs of weakness in 2004 as yet. While prices have cooled in the Asian region, economic recovery in the US and the EU have lend support to the steel cycle, helping the prices to sustain. While we accept the fact that the current cycle upturn has extended beyond our expectation of peaking in early FY05, we continue to believe that the current levels of steel prices are not sustainable. This makes us apprehensive of prospects of earnings growth beyond FY05. Further, though strong earnings over the next couple of quarters may support near term price momentum, investing in commodity stocks wherein the cycle is at or nearing its peak tilts the risk-reward ratio considerably against the investor. Steel stocks over the week

Key losers over the week (NSE-50)
COMPANY Price on Oct 1 (Rs) Price on Oct 9 (Rs) % CHANGE 52-WEEK H/L (Rs)
HERO HONDA 454 436 -3.9% 544 / 298
BPCL 361 351 -3.0% 533 / 230
CIPLA 298 290 -2.7% 302 / 194
GLAXO 664 649 -2.3% 709 / 442
ABB 761 743 -2.3% 850 / 451
Note: Click on the link above to read our view on the company/sector

Two-wheeler stocks, Hero Honda (down 4%) and Bajaj Auto (down 2%) bucked the market trend to register losses during the week. This could seemingly be owing to the fact that while the growth in volumes will not be a problem for these players, it is the intensifying competition from global majors like Honda and Suzuki that needs to be seriously looked into. Competing against such heavyweights would require frequent new launches and contemporary models, which would mean greater investments and shorter product life cycles. Thus, while margins are likely to be affected, pay-offs would not be a certainty. Overall, we believe, risks seem to outweigh return. Auto stocks during the week

Going forward, as India Inc.’s results start pouring in from next week onwards, there could be significant volatility on the bourses. This is because, since a lot of expectations have already been built into the current stock prices, their valuations would get aligned depending on the ‘worse-then-expected’ or ‘better-than-expected’ results by companies. Further, while we believe that India Inc. (on a broader scale) would continue to perform well in the medium to long-term, at the current juncture, it is time to sit back and re-look at stock specific fundamentals and valuations, which have outperformed the benchmark indices by huge margins and make sure if their current valuations justify their growth prospects.

  • Market commentary for Saturday October 09, 2004

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