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Consolidation before the festive season!

Oct 20, 2006

The previous week saw the Indian indices consolidating at the higher levels after the heady action seen the week before, when the Sensex hit, crossed and closed above its previous all-time high levels hit in May. Even as India Inc has largely reported enthusing results for 2QFY07, the fact that the indices were at their all-time highs and at valuations that were not that cheap led to participants taking some profits off the table during the week. For the week, the BSE-Sensex lost a marginal 0.2%, while the NSE-Nifty ended virtually unchanged week-on-week. Coming to the trade for the week, Monday saw a continuation of the stunning surge seen in the last week, as the buoyancy and euphoria just did not seem to subside. The day saw the Sensex come within just 6 points of the 13,000-mark, and the closing level at 12,928 was less than 100 points away. However, come Tuesday, participants became edgy at the all-time high levels and resorted to profit booking, even as major corporates such as software major, TCS, reported enthusing 2QFY07 results. The weak trend that was witnessed at the start continued right till the end of trade. Wednesday saw a positive start, only to result in profit booking immediately dragging the indices down, even as Wipro, the third software major to announce its results, also declared enthusing results. While the markets did see some positive trends during the day, these wee wiped out during the final hour of trade.

On Thursday, the profit-booking mode was in full flow, as the indices lost significant ground. There was significant volatility witnessed, which is not surprising, considering the fact that the indices are close to their all-time highs. On Friday, however, the start was buoyant ahead of the Diwali weekend and the 'Mahurat' trading session to be held on Saturday. Buoyant September quarter numbers by major corporates and buying at lower levels were seemingly the triggers for this buoyant start. However, even as the best part of the day was well in the positive, the final hour of trade saw profit booking by participants completely erase the day's gains and close in the negative.

As far as the institutional activity on the bourses was concerned, Foreign Institutional Investors (FIIs) were net buyers this week to the tune of nearly Rs 32.5 bn. Domestic mutual funds (MFs), on the other hand, turned out to be net sellers to the tune of Rs 3.4 bn.

Net investments
(Rs m) FIIs MFs Total
13-Oct-06 10,938 (408) 10,530
16-Oct-06 7,947 656 8,603
17-Oct-06 3,890 (1,211) 2,679
18-Oct-06 10,079 (1,767) 8,313
19-Oct-06 (371) (710) (1,081)
Total 32,483 (3,440) 29,043

The BSE Sensex, the benchmark index, closed marginally lower during the last week by 0.2%, while the NSE Nifty ended virtually unchanged. As regards sectoral indices, this week, it was the BSE Metal index that soared by 3.4%, thanks in the main to highly impressive results announced by aluminium and copper major, Hindalco, and also news that the Corus Group has accepted Tata Steel's offer of 455 pence per share to buy it. This news assumes significance, as the Tata Steel-Corus combine would become the fifth-largest steel maker globally, with a combined capacity of 24 m tonnes (MT). The deal, if it goes through, will be the largest-ever acquisition abroad by any Indian company, making it an event of some significance. The BSE Bankex also gained 1.6% during the week, buoyed by encouraging numbers posted by majors, HDFC Bank and HDFC. The BSE Mid-cap index also managed to gain a marginal 0.3%. Amongst the losers last week, the BSE Auto index clearly stands out, depressed in a major way by the relatively disappointing performance of Bajaj Auto in 2QFY07, wherein it reported just a 10% YoY growth in its net profits, impacted adversely by lower margins. The BSE FMCG index also lost 1.4%, while the other indices did not see much movement either way. The BSE IT index, after a scorching run the previous week, wherein it gained as much as 9.0%, lost 0.6% this week. This was the case even as software majors TCS, Wipro, Satyam and HCL Tech announced impressive results for the quarter, since good performances by these companies had already been factored in.

Key indices over the week
Index As on October 13 As on October 20 % Change
BSE AUTO 5,502 5,315 -3.4%
BSE BANKEX 6,107 6,205 1.6%
BSE FMCG 2,036 2,009 -1.4%
BSE HEALTHCARE 3,658 3,632 -0.7%
BSE IT 4,797 4,767 -0.6%
BSE METAL 8,691 8,985 3.4%
BSE OIL&GAS 5,906 5,893 -0.2%
BSE PSU 5,884 5,825 -1.0%
BSE MIDCAP 5,288 5,302 0.3%
BSE SMLCAP 6,417 6,386 -0.5%

Having looked at the institutional activity and the movement in key indices in the last week, let us consider some sector/stock specific developments:

  • After Infosys, Asia's largest software company, TCS, announced its results for the second quarter and half-year ended September 2006 late on Monday evening. For the quarter, continued traction in major service lines and ramp ups by major clients across geographies and verticals led to a good performance on the topline front (8.2% QoQ growth). Margins powered ahead, driven by lower employee costs, SG&A leverage and a strong shift towards offshore. The performance at the bottomline level (up 14.9% QoQ) has been impressive, which was driven entirely by the strong margin expansion seen during the quarter, even as other income fell significantly on a sequential basis and the effective tax rate was marginally higher. For the half-year also, the performance has been impressive. The stock closed the week lower by 1.4%. Other software stocks.

  • Defying investor concerns about a slowdown in mortgage lending, the largest mortgage lending institution in the country, HDFC, announced robust results for 2QFY07 on Thursday, in line with that clocked over the past several quarters. While there are no aberrations on the asset growth and margin fronts, growth in other income is also enthusing. Lower provisioning and control over operating expenses have aided the buoyancy in profits. While the retail loans continue to comprise a major 68% of HDFC's advance book, the big-ticket corporate loans seem to be growing at a faster pace. Disbursements in respect of individual loans and corporate loans grew by 25% YoY and 32% YoY respectively in 2QFY07. While on one hand, a 28% YoY growth in incremental approvals backed by 27% YoY growth in disbursements suggests consistency in the HDFC's performance over the corresponding quarter of FY06, on the other hand, no perceptible change in the disbursal-to-sanction ratio defies concerns over slowdown. The net interest income of HDFC continues to be buoyant due to higher yields on assets. HDFC's stock closed the week lower by 5.4%. Other financial sector stocks.

    Top gainers during the week (BSE-A)
    Company Price on
    Oct 13 (Rs)
    Price on
    Oct 20 (Rs)
    %
    Change
    52-Week
    H/L (Rs)
    BSE-SENSEX 12,736 12,709 -0.2% 12,994 / 7,656
    S&P CNX NIFTY 3,676 3,677 0.0% 3,774 / 2,307
    ING VYSYA BANK 141 167 17.8% 177 / 82
    CMC LTD. 581 662 14.0% 685 / 335
    ABB 3,089 3,490 13.0% 3,550 / 1,590
    IPCA LABS 395 442 11.9% 460 / 235
    HINDUSTAN ZINC 718 793 10.5% 1,119 / 202

  • Pharma major Ranbaxy announced strong results for the third quarter and nine months ended September 2006 this week. Strong performances in the US backed by the 180-day exclusivity received for 'Simvastatin' and BRICS markets backed by contribution from Terapia have contributed to the topline growth (up 18% YoY) during the quarter. That said, the key markets of UK, France and Germany reported a decline in revenues. Operating margins have improved sharply from 3.1% in 3QCY05 to 16.8% in 3QCY06 due to lower raw material, SG&A costs and R&D expenditure. All these factors put together have resulted in the company reporting a superlative bottomline growth. The stock closed the week lower by 1.3%. Other pharma stocks.

    Top losers during the week (BSE-A)
    Company Price on
    Oct 13 (Rs)
    Price on
    Oct 20 (Rs)
    %
    Change
    52-Week
    H/L (Rs)
    STERLING BIOTECH 138 118 -14.7% 157 / 87
    BAJAJ AUTO 3121 2742 -12.2% 3,325 / 1,650
    INDO RAMA SYN. 64 57 -10.8% 85 / 43
    APOLLO HOSPITALS 497 444 -10.7% 589 / 340
    CHENNAI PETRO 202 183 -9.4% 274 / 143

  • In a very important development, Anglo-Dutch steel maker Corus has accepted Tata Steel's bid at 455 pence per share. The deal will be completed only on the fulfillment of a minimum acceptance of 75% of Corus' shareholders. The acquisition will be made via a wholly subsidiary of Tata steel, Tata Steel UK. Tata Steel has valued Corus at US$ 9 bn and to fund this acquisition, the company is raising debt to the extent of US$ 6 bn from three banks - ABN Amro, Standard Chartered and Deutsche Bank. After the completion of the deal, the Tata Steel-Corus combine will emerge as the fifth-largest steel maker globally, with a total capacity of 24 m tonnes per annum (MTPA), making Tata Steel a significant player in the world market for steel. This acquisition, if it goes through, will be the largest ever by any Indian company abroad, making it a landmark event of sorts. The stock, however, closed the week lower by 0.7%. Other steel stocks.

With the last week having seen some consolidation in the indices, it will certainly not be surprising to see enhanced volatility at these levels. We have always mentioned that investors must look not at what valuations the indices are trading at, rather at what valuations individual stocks are trading at. At these levels, while on a macro basis, we would advise some caution, on an individual stock basis, we believe that there are still numerous opportunities out there to buy good businesses with strong growth prospects, a strong business model and capable management teams at reasonable valuations. This is particularly true in the mid-cap space. In fact, this is something that we have been saying for quite a while now, and enterprising and observant investors will surely uncover these 'hidden gems'.

Next week will see the continuation of the 2QFY07 results. The results announced so far have been highly impressive on a macro basis, and clearly point to continuing strong corporate profit growth on the back of impressive economic growth. We remain positive on the 'India story', and believe that investors can make good money in Indian equities over a longer period of time. With the festive season in full flow, there could not be a better time to wish our readers a Happy Diwali and a Very Prosperous New Year! Happy Investing!


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