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Volatility reigns... - Views on News from Equitymaster
 
 
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  • Oct 13, 2007

    Volatility reigns...

    Markets movements during the week ended 12th October 2007 were marked by significant volatility as curt crashes and swift recoveries became the order of the week. Although bears made their presence felt during the week, with indices closing in the red for two out of five trading sessions, the bulls were not complaining as the domestic indices closed the week with gains of around 4%.

    The week began on a negative note with the BSE Sensex losing more than 300 points on Monday after opening with a positive gap of 129 points. The sell-off was led by metal and power stocks as the BSE Metal Index shed more than 4% for the day. However, the bulls were back with a vengeance on Tuesday, as the Sensex closed the day with its biggest-ever single day gain up 789 points from its previous close. Markets continued their northbound journey in the next two trading sessions with BSE Sensex gaining 378 and 151 points on Wednesday and Thursday respectively. Bears made a comeback on Friday, with the BSE Sensex losing close to 400 points. On the sectoral indices front, the BSE Capital Goods Index and the BSE Bankex (each down 2.7%) emerged as the key losers. For the week, while BSE-Sensex advanced by 3.6%, NSE-Nifty closed with gains of 4.7%.

    On the institutional activity front, between 5th and 10th October, while Foreign Institutional Investors (FIIs) emerged as net buyers to the tune of Rs 77 bn, mutual funds sold equities worth Rs 13 bn.

    (Rs m) MFs FIIs Total
    5-Oct (2,749) 5,750 3,001
    8-Oct (3,312) 34,199 30,887
    9-Oct (3,409) 19,511 16,102
    10-Oct (3,549) 17,479 13,930
    Total (13,019) 76,939 63,920

    On the sectoral indices front, the BSE Metal Index and the BSE Oil & Gas Index featured among the key gainers with gains of 5.1% and 4.6% respectively, while the BSE Infotech Index lost 1.1%.

    Index As on October 5 As on October 12 % Change
    BSE IT 4,740 4,688 -1.1%
    BSE SMLCAP 9,102 9,099 0.0%
    BSE OIL AND GAS 10,110 10,576 4.6%
    BSE HEALTHCARE 3,826 3,806 -0.5%
    BSE AUTO 5,366 5,515 2.8%
    BSE PSU 8,341 8,673 4.0%
    BSE MIDCAP 7,486 7,529 0.6%
    BSE FMCG 2,107 2,142 1.7%
    BSE BANKEX 9,225 9,311 0.9%
    BSE METAL 14,122 14,841 5.1%

    Now let us have a look at some of the key stock/sector specific developments during the week:

    Software major, Infosys announced its 2QFY08 results today. The topline grew by 9% QoQ on the back of 1.9% QoQ growth in blended billing rates and 7.6% QoQ growth in volumes. The operating margins expanded by 2.6% QoQ, aided by higher utilisation. Other income dropped sharply due to change in hedging policy in the previous quarter. Higher taxes, largely due to MAT, restricted the PAT growth to 2% QoQ for the quarter. While 48 new clients were added during the quarter, attrition rose to over 14%. Software stocks closed weak with I-flex (down 5%) and Infosys (down 3%) leading the pack of losers.

    The government has announced a slew of measures to help the sugar industry. Subsidised loans would be given to sugar mills to help them clear dues of farmers and making mandatory the blending of 5% ethanol in petrol with immediate effect across the country, barring the North East, Jammu and Kashmir and the island territories. It has also allowed sugar factories to produce ethanol directly from sugarcane juice to augment its availability and reduce the oversupply of sugar. Further, 10% blending has been made optional from this year, but this would become mandatory from next October. A uniform nationwide purchase price of Rs 21.5 per litre (ex-factory) for supply of ethanol for the next three years was also decided at a meeting of the Cabinet Committee on Economic Affairs. The CCEA has also extended export subsidy by one more year from April 19, 2008 to April 18, 2009, to target an additional export of 3 million tonnes of sugar. The Indian sugar industry is facing its worst crisis, due to higher supply of sugar. Most companies have incurred losses in the last two quarters. The decision would bring some relief to the industry. Sugar stocks closed in the red with Balrampur Chini (down 3%) and Bajaj Hindusthan (down 2%) leading the pack of losers.

    Top gainers during the week (BSE A)
    Company Price on
    October 5 (Rs)
    Price on
    October 12 (Rs)
    %
    Change
    52-Week
    H/L (Rs)
    BSE SENSEX 17,773 18,419 3.6% 18,845 / 12,315
    S&P CNX NIFTY 5,186 5,428 4.7% 5,549 / 3,546
    IGATE GLOBAL 241 374 55.3% 432 / 208
    GMDC 1,262 1,851 46.7% 1,851 / 333
    VSNL 451 526 16.6% 559 / 342
    BOI 275 312 13.5% 324 / 132
    RELIANCE ENERGY 1,447 1,636 13.1% 1726 / 448

    Pharma stocks closed mixed for the week with Nicholas Piramal (up 6%) and Glenmark Pharma (up 5%) leading the pack of gainers, while Dr. Reddy's (down 6%), Novartis and Aurobindo (each down 5%) were out of favour. As per a leading business daily, pharma majors Aurobindo, Cadila and Lupin are set to hive off their R&D units to reduce cost pressures and improve valuations of their other businesses. As a matter of fact, R&D is heavy on costs. Domestic pharma companies find it prudent to de-merge R&D into a separate unit to reduce the cost burden of other businesses. This, in turn, improves the valuation of the other businesses. The practice is, however, confined to the Indian space where R&D is not really the core activity. Global companies such as Pfizer or Merck have not adopted such a model because their core business activity is R&D. Such companies are instead divesting their manufacturing units or entering into contract manufacturing tie ups in low-cost locations such as India and South Africa. Big companies like Nicholas Piramal and Sun Pharma have already hived off their R&D units into separate businesses.

    Top losers during the week (BSE A)
    Company Price on
    October 5 (Rs)
    Price on
    October 12 (Rs)
    %
    Change
    52-Week
    H/L (Rs)
    FACT 28 24 -11.8% 30 / 19
    IOC 503 454 -9.9% 585 / 370
    CHAMBAL FERT 56 51 -9.6% 63 / 30
    NATIONAL FERT 50 46 -8.9% 53 / 26
    MRPL 68 62 -8.5% 83 / 32

    FIIs continued their obsession with emerging markets. As expected, markets during the week were primarily driven by the liquidity factor as the FIIs went on a buying binge, counting on a further appreciation in the rupee vis-a-vis dollar. Though investors might find this as a reason to cheer, they need to be cautioned about the short-term nature of this 'hot' money. With valuations taking a backseat in this mad rush of capital inflow, we advise investors to concentrate on the fundamental aspect and not get carried away by the one-way movements in the indices. The fundamentals will get manifested in the upcoming results season.

    The current markets remind us of Warren Buffett's remark that bull markets make the investors think "I can't miss the party". While the India story has roots in strong fundamentals, the valuations are running ahead of themselves on the back of overenthusiastic FII money. We urge you dear investor to be fearful when others are greedy. No stock is good at "any" price. Stock prices sooner or later revert to intrinsic value of the underlying business and the current upward run in prices contain a fair amount of euphoria in addition to business value. And, euphoria never lasts forever! Happy investing.

     

     

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    Aug 23, 2017 03:36 PM

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