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Slipping and sliding! - Views on News from Equitymaster
 
 
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  • Oct 15, 2005

    Slipping and sliding!

    The much-awaited correction seems to have finally descended on Indian stock markets. At least that's what it seems, considering the one-way slide the Indian stockmarkets have witnessed over the last fortnight. With the benchmark indices correcting a further 3%+ this week, these have now corrected about 5% in the last fortnight (about 8% from intra-week peak). However, unlike last week, this time around, the selling was broad based, as the mid-cap and small-cap segments of the market also witnessed profit booking, which is evident from the 4% and 6% weekly losses registered by the respective indices (on the BSE).

    Continuing with last week's trend, the Indian stockmarkets opened on a considerably weaker footing on Monday. However, investors opting to buy at lower levels helped the markets to slowly and steadily gain ground and the BSE-Sensex soon found itself peeping into the positive territory. However, post that, a strong bout of profit booking pushed the indices back deeper into the red, as the benchmark indices lost over 2%. The behaviour of the markets was pretty much the same almost throughout the week, with incessant selling pressure witnessed at the slightest signs of strength.

    While our markets may have corrected a good deal over the last fortnight, this time around, it wouldn't be justified to single out the Indian stockmarkets. This is because profit booking has been witnessed across markets, with most of the developed and emerging world stockmarkets having lost 2% to 10% from their peaks in the last fortnight. Similar to the world over, it has largely been selling pressure from Foreign Institutional Investors (FIIs) that has developed this crack in the Indian stockmarkets. However, not everybody is negative on the Indian stockmarkets as yet. While FIIs have sold almost Rs 10 bn in the last couple of weeks, domestic mutual funds (MFs), which have collected huge sums of money from investors in the recent past, continued to deploy the same into Indian equities (see chart above).

    Top gainers over the week (NSE-50)
    Company Price on
    Oct 7 (Rs)
    Price on
    Oct 14 (Rs)
    %
    Change
    52-Week
    H/L (Rs)
    BSE-SENSEX 8,492 8,202 -3.4% 8,822 / 5,558
    S&P CNX NIFTY 2,574 2,484 -3.5% 2,669 / 1,750
    SUN PHARMA 648 660 1.8% 688 / 375
    INFOSYS 2,572 2,602 1.1% 2,730 / 1,711
    CIPLA 367 369 0.7% 399 / 212
    NALCO 171 171 0.3% 209 / 138

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

    • While the bear carnage continued on the bourses this week, software bellwether, Infosys, managed to buck the bearish trend and ended the week with 1% gains. This could be attributed to the strong set of numbers delivered by the company for the second quarter ended September 2005. Stable-to-positive billing rates, strong volume growth and traction in key service lines led to a strong double-digit sequential topline growth for the quarter, despite the strong hiring. Bottomline growth was even stronger than topline growth, driven by considerably higher other income and a lower effective tax rate, resulting in net margins expanding sequentially. On a half-yearly basis, the performance has been strong as well, with the company hitting the US$ 1 bn revenue mark in just half the year. Though other software companies like TCS and MphasiS BFL also announced good results, they could not make it to the gainers list. Other software stocks

    • Auto major, M&M, is aiming to double its exports of sports utility vehicles (SUVs) to around 6,000 units in FY06. In order to achieve this, the company plans to export around 5,000 units of 'Scorpio' and 1,000 units of 'Bolero'. For this purpose, the company is eyeing the Russian, Malaysian and European markets where the demand for SUVs is expected to be strong. Apart from this, the company also expects the exports to Middle East and Latin American countries to grow. This move is line with the strategy of the company to diversify its geographical reach in order to de-risk its revenue streams and insulate itself against fall in demand in any one region. The stock ended the week lower by 4%. Other auto stocks

    • Oil refining and marketing major, BPCL, has indicated that it expects a substantial rise in its gross refining margins (GRMs) in the second half of FY06. It expects a rise in heavy crude component from 40% to 50% on its enhanced capacity of 12 MT during 2HFY06. GRMs will receive a further boost once the company expands its pipeline for carrying petro-products up to Delhi by the end of CY06. The North Indian market offers additional revenue of Rs 1,200 to Rs 1,400 per tonne compared to the western region and as a result, a margin upside can be expected. This is good for the company, which is already reeling under the burden of high crude prices and is unable to pass on the rise to consumers due to the government's arbitrary policy. The stock, however, ended lower by over 4%. Other energy stocks

      Top losers over the week (NSE-50)
      Company Price on
      Oct 7 (Rs)
      Price on
      Oct 14 (Rs)
      %
      Change
      52-Week
      H/L (Rs)
      RANBAXY 523 443 -15.2% 640 / 395
      GUJ. AMBUJA 76 67 -11.6% 79 / 42
      HINDALCO 147 132 -10.1% 164 / 107
      SAIL 63 57 -8.8% 70 / 44
      GRASIM 1,314 1,211 -7.8% 1,415 / 1,010

    • Ranbaxy was the top loser amongst the index stocks this week (down 15%). This was owing to the fact that a UK court dealt a blow to Ranbaxy's challenge to Pfizer's blockbuster drug, 'Lipitor', when it held the latter's patent on the main active ingredient in the drug (API), 'atorvastatin', to be valid. However, Ranbaxy has won a related patent covering the calcium salt of 'atorvastatin'. While Ranbaxy will be appealing this decision, it must be noted that if Pfizer wins the appeal hearing as well, the former will not be able to launch the generic version of the drug before CY11. This is the year when the patent of Lipitor is originally scheduled to expire. In CY04, 'Lipitor' generated revenues to the tune of US$ 12 bn, out of which the US accounted for around 80% and UK for around 7%. The all-important US decision on the same is expected to be declared towards the end of CY05. Other pharma stocks

    Despite the results season having begun on a strong note, the markets have gone on a downward tailspin. While this is undoubtedly more of a global phenomenon rather than a country or a region-specific development, the fact, despite the correction, remains that the Indian stockmarkets continue to remain a tad expensive at 16.8 times trailing 12-months earnings. Investors must note that the Sensex P/E was 18.2 times just a fortnight ago. Our advise to investors at the current juncture would be to avoid timing the markets and follow a bottom-up approach while investing and to stagger the investments over a period of time. Remember, in the long-term, it is only the fundamentals of the company that would determine the fate of its stock. Happy and safe investing!

     

     

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