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The P-note pain! - Views on News from Equitymaster
 
 
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  • Oct 20, 2007

    The P-note pain!

    The bulls were in for a rude shock during the week as led by heavy FII selling, the BSE Sensex plunged 1,500 points in the last three trading sessions. The sudden change in sentiments was on account of the proposed clampdown on participatory notes by the market watchdog SEBI.

    The week began on a strong note with the BSE Sensex advancing more than 600 points on Monday to zoom past the 19,000 milestone for the first time ever. Metal and power stocks led the rally, with BSE Metal Index gaining more than 9%. However, bears managed to restrict the bulls on Tuesday, as the indices closed flat after gaining close to 1% in early trades. Wednesday went down as a historical day for the markets as the indices hit circuit limits within minutes of opening, following the proposed clampdown on participatory notes (P notes) by SEBI. Thereafter, indices witnessed an amazing recovery to close the day with a better than expected 2% losses after some clarification from the Finance Minister and SEBI. The P note factor continued to haunt the markets for the rest of the week as the BSE Sensex shed more than 700 points on Thursday, followed by a 439 points decline on Friday. For the week, while BSE Sensex declined by 4.7%, NSE Nifty lost 3.9%.

    On the institutional activity front, between 12th and 18th October, while FIIs emerged as net buyers to the tune of Rs 10 bn, mutual funds sold equities worth Rs 9 bn.

    (Rs m) MFs FIIs Total
    12-Oct (7,238) 1,936 (5,302)
    15-Oct 1,114 9,565 10,679
    16-Oct (3,003) 2,861 (142)
    17-Oct 162 (4,404) (4,242)
    18-Oct (2,655) 312 (2,343)
    Total (8,965) 10,270 (1,350)

    On the sectoral indices front, BSE FMCG (down 5.6%) and BSE Bankex (down 5.1%) featured among the key losers, while the BSE Infotech Index closed flat.

    Index As on October 12 As on October 19 % Change
    BSE IT 4,688 4,686 0.0%
    BSE SMLCAP 9,099 8,800 -3.3%
    BSE OIL AND GAS 10,576 10,242 -3.2%
    BSE HEALTHCARE 3,806 3,715 -2.4%
    BSE AUTO 5,515 5,297 -3.9%
    BSE PSU 8,673 8,211 -5.3%
    BSE MIDCAP 7,529 7,239 -3.9%
    BSE FMCG 2,142 2,022 -5.6%
    BSE BANKEX 9,311 8,838 -5.1%
    BSE METAL 14,841 14,480 -2.4%

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

    TCS and Nielsen company, the world's leading provider of consumer and media information services, have entered into an agreement for outsourcing a portion of Nielsen's IT and operations functions worldwide. Under the ten-year agreement, valued at US$ 1.2 bn, TCS will assume responsibility for important IT and operational processes and help Nielsen integrate and centralize multiple systems, technologies and processes on a global scale. TCS will also assume responsibility for certain finance and HR business processes, which will be executed on new BPO platforms built by TCS. As part of the agreement, TCS will take direct responsibility for a Nielsen team based in Baroda that has developed significant expertise in key information-management processes for Nielsen's Retail Measurement Services (RMS). The addition of this team will complement TCS's established (KPO) team and help to accelerate development of TCS's KPO service delivery platform. This development will enhance TCS' domain expertise and make it one of the largest KPO providers in India, working in such areas as analytics & reporting and reference data management. Software stocks closed mixed with Satyam (up 8%), TCS (up 5%) and Wipro (up 4%) leading the pack of gainers, while I-flex (down 12%) and Tech Mahindra (down 7%) closed in the red.

    As per a leading business daily, M&M is planning to restructure its six auto-component companies to form an umbrella company-Systech before going for an initial public offering. The six companies are Mahindra Engineering, Mahindra Sourcing, Mahindra Forging, Mahindra Gears, Mahindra Composites and Mahindra Steel Products. Under the restructuring plan, the six businesses would be brought under a new company. Presently, Systech manages these six businesses of which three are listed. Promoters in the listed companies hold 45.1% in Mahindra Composites, 47.1% in Mahindra Forging and 55.5% in Mahindra Ugine Steel Company. In the unlisted companies, promoters hold virtually the entire stake. The company is planning to list the new company, Systech, next year in order to provide an avenue for interested investors to take advantage of Systech's portfolio. Auto stocks closed weak with M&M (down 12%) and TVS (down 11%) and Ashok Leyland leading the pack of losers.

    Top gainers during the week (BSE A)
    Company Price on
    October 12 (Rs)
    Price on
    October 19 (Rs)
    %
    Change
    52-Week
    H/L (Rs)
    BSE SENSEX 18,419 17,560 -4.7% 19,199 / 12,316
    S&P CNX NIFTY 5,428 5,215 -3.9% 5,737 / 3,555
    GMDC 1,851 2,224 20.1% 2587 / 333
    POWER GRID CORP 114 132 15.8% NA
    MRF LTD 4,069 4,629 13.7% 5,190 / 3,100
    NIIT 122 132 8.2% 172 / 40
    STERLITE OPTICAL 235 254 7.9% 305 / 154

    Banking stocks closed in the red with BOI, IDBI (down 18% each) and Union Bank (down 16%) featuring among the key losers. HDFC Bank announced its results for the second quarter and half year ended September 2007 on Friday. The bank reported an interest income growth of 49% YoY on the back of higher PLR and 33% YoY growth in advances for 2QFY08. Growth in retail asset mellowed to 37% YoY in 2QFY08 against 44% YoY in 2QFY07. Net interest margins dropped to 4.0% from 4.6% in 1QFY08 on the back of HTM write-offs. Fee income grew at 25% YoY, while the capital adequacy ratio (CAR) was comfortable at 14.9%. The bank added just 1 branch in 2QFY08 as against 69 branches during the first quarter of FY08 taking the network to 754 in 320 cities. The stock along with its peer ICICI Bank closed firm today (each up 5%).

    Top losers during the week (BSE A)
    Company Price on
    October 12 (Rs)
    Price on
    October 19 (Rs)
    %
    Change
    52-Week
    H/L (Rs)
    ACC 1,251 991 -20.7% 1,315 / 680
    RELIANCE ENERGY 1,636 1,333 -18.5% 1,959 / 448
    BANK OF INDIA 312 256 -17.9% 331 / 132
    IDBI 145 119 -17.6% 163 / 67
    RELIANCE CAPITAL 1,817 1,498 -17.6% 1,970 / 530

    We have been cautioning investors about the one-way movement in stocks in our previous round-ups. The euphoria seems to be finally over with the BSE Sensex losing 1,500 points in just 3 trading sessions - remember how media blared about the upward journey from 18k to 19K in just 4 sessions. Sadly, the downward journey is always much more painful. While some of you may argue that the correction was a forced one, we believe that the market was over heated and was looking for an excuse to correct itself. While the markets may see further correction, we opine that instead of being fearful, investors should use the current weakness in the market to buy good quality stocks at bargain prices.

     

     

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