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Markets: Taking stock...

Oct 23, 2007

Volatility in the stock markets has been the buzzword this year and this was amply demonstrated in the past one month when the index gyrated wildly by a huge margin both in the positive and in the negative. As mentioned in previous articles, factors such as subprime crisis in the US, policies of the central banks both in India and the US, surge in the FII inflows, political uncertainty and the like have impacted the Indian bourses so far. In this article, we shall take a look at how some of the sectoral indices have fared in the year so far.

Sectoral indices: Performance so far
Company Price on Oct 19, 2007 (Rs) Price on Jan 02, 2007 (Rs) % Change
BSE Oil & Gas 10,242 6,240 64.2%
BSE Metal 14,480 9,122 58.7%
BSE Sensex 17,623 13,942 26.4%
BSE Bankex 8,838 7,120 24.1%
BSE Healthcare 3,715 3,820 -2.8%
BSE Auto 5,297 5,696 -7.0%
BSE IT 4,686 5,369 -12.7%

Commodities: Both the BSE Oil & Gas and the BSE Metal index surpassed the Sensex by a huge margin notching gains of 64% and 59% respectively for the ten months of 2007. This can be attributed to mounting commodity prices, which have enabled companies to enjoy higher realisations. As far as energy stocks are concerned, the rise can be attributed to rising crude prices (beneficial to refineries), inking new ventures in exploration and gas distribution, investing in oil assets abroad and the move to issue oil bonds to OMCs to insulate them from steep global crude prices. Strong demand and improved realisations have also aided the momentum in metal stocks.

Banking: Banking stocks have also garnered good returns in the year so far having raked in gains of 24%. The start of the year saw the Bankex taking a beating on the back of inflationary concerns and steps taken by the RBI to curb the excess liquidity in the system by undertaking a CRR hike. However, post March, interest in the banking stocks was renewed with most of the top banks unveiling capital raising plans to meet the rising demand for credit and also in compliance with the Basel II norms. Going forward, Indian banks face the challenge of maintaining profitability even as rising interest rates start to affect the borrowers' repayment capacity. The need for infusing further capital will also remain strong and having plans to raise big amounts of capital from both the domestic and international markets, any sustained deterioration in global liquidity could affect growth prospects.

Healthcare: Pharma stocks continued to disappoint investors and the BSE Healthcare index has lost 3% in the year so far. Unabated pricing pressure in the US generics market and some of the European markets (notably Germany) continued to dampen investor sentiments. Sharp appreciation of the rupee against the dollar (exports account for around 50% to 80% of total revenues of most of the pharma companies) and rising raw material prices (due to high cost of importing intermediates from China) have also taken its toll. The performance of MNC pharma companies also left a lot to be desired. Going forward, we believe that the pressure on the governments across the world to reduce healthcare costs and the increase in the number of drugs going off patent will remain the cornerstones of the India generics story. Pricing pressure is expected to continue and we believe that this concern has already been factored in the stock prices.

Auto: The BSE Auto index fell by 7% in the year so far. The sector has been facing the heat due to the rising interest rate scenario, which has impacted volume growth especially that of two-wheelers and this was visible during both the June and the September quarters when the motorcycle industry witnessed a fall in volumes by 15% YoY and 16% YoY respectively. This was due to the strict stance adopted by financial institutions towards funding two-wheeler loans. Besides this, growth in the other two segments namely passenger and commercial vehicles had also decelerated significantly in the first quarter of FY08.

Software: Steep appreciation of the rupee against the dollar has, not surprisingly, taken its toll on software stocks with the BSE IT index having fallen by around 13% in the year so far. The rupee has appreciated by around 7% and has had a telling impact on the revenues and operating margins of software companies, which are largely export oriented. Having said that, from a long-term perspective, we believe that these top-tier software companies, with their superior scalable business models and stronger operating metrics relative to their mid-sized peers, will benefit more from the offshoring story, and overall we remain positive on the sector.

To conclude...
Despite the increasing volatility exhibited by markets in recent times, it is imperative for investors to refrain from timing the markets but instead invest in good quality stocks from a long-term perspective. These stocks will continue to reward shareholders with good returns despite the short-term fluctuations witnessed on the Indian bourses.

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