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Small week, big gains!

Oct 28, 2006

The week gone by saw renewed buying interest among market participants, backed in good measure by yet another strong quarterly performance by India Inc. As a consequence, the BSE Sensex is again less than 100 points away from the psychologically crucial barrier of 13k. For the week, the BSE-Sensex gained 1.6%, while the NSE-Nifty edged higher by an almost similar margin.As far as the trading activity for the week is concerned, despite robust performances by some of the leading lights of India Inc during 2QFY07, investors remained largely jittery ahead of the holiday shortened week and this resulted in the indices closing in the negative on Monday. Markets reopened on Thursday after a two-day festive season break and this time round, strong 2QFY07 performance by yet another set of companies did not go unnoticed. With companies across sectors reporting good numbers, investors lapped them up thus resulting into a positive closing for the benchmark indices. Steady stream of buoyant results continued to flow on Friday, the last trading day of the week and investors did an encore and pushed the markets to close higher by more than 200 points, thus ending the week's proceedings on an optimistic note.

Net investments
(Rs m)FIIsMFsTotal
20-Oct-06(231)(13)(244)
23-Oct-061,688 (49)1,639
26-Oct-064,932 4,932
Total6,389 (62)6,327

The BSE Sensex, the benchmark index, closed higher during the last week by 1.7%, while the NSE Nifty ended 1.8% higher. As regards sectoral indices, this week, it was the BSE Bankex that soared by 3.1%. This is seemingly on the back of the fact that most of the sector bellwethers like ICICI Bank, HDFC Bank and UTI Bank have reported good set of numbers for 2QFY07. It should, however, be borne in mind that while our outlook on the banking sector remains positive from a long-term perspective, current valuations certainly call for caution. BSE PSU index and the small cap index were the other gainers over the week, thus rounding off the top three positions.

Key indices over the week
IndexAs on October 20As on October 27% Change
BSE Bankex6,205 6,399 3.1%
BSE PSU5,825 5,954 2.2%
BSE SMLCAP6,386 6,520 2.1%
BSE MIDCAP5,302 5,396 1.8%
BSE METAL8,985 9,132 1.6%
BSE IT4,767 4,840 1.5%
BSE OIL AND GAS5,893 5,981 1.5%
BSE Auto5,315 5,393 1.5%
BSE FMCG2,009 2,010 0.1%
BSE HEALTHCARE3,632 3,630 -0.1%

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

Hero Honda, India's largest two-wheeler manufacturer announced its 2QFY07 earlier this week. The company put up a weak performance during 2QFY07 as it faced market share as well as cost related pressure. On a modest topline growth of 3%, the bottomline of the company has shrunk by 9% as compared to same quarter last year. This was largely a result of contraction in operating margins to the tune of 270 basis points. Had it not been for the increase in other income and lower tax outgo, damage would have been even higher. 1HFY07 performance has been slightly better with the company recording a 3% growth in profits on the back of an 11% growth in topline. Not surprisingly, the stock closed ended the week lower by 2%. Other auto stocks

ICICI Bank, India's largest private sector bank also announced its 2QFY07 results early this week. It has reported robust set of numbers, primarily backed by accelerated asset growth and buoyant fee income. The bank witnessed a strong traction in its rural and international portfolios. The steady NIMs and lower tax incidence also aided the bottomline growth for the period under review. A higher slippage ratio, however, poses some concerns on the quality of incremental lending. While the asset growth and NIM figures have outdone our estimations, we choose to adopt a cautious stance given the possibility of higher delinquencies and pressure on margins. The stock closed higher by 3% for the week. Other banking stocks

Top gainers during the week (BSE A)
CompanyPrice on
Oct 20 (Rs)
Price
on Oct 27 (Rs)
%
Change
52-Week
H/L (Rs)
BSE Sensex 12,709 12,907 1.6% 12994/7,656
S&P CNX NIFTY3,677 3,739 1.7% 3,774/2,307
ALSTOM PROJECTS342 402 17.5%442/163
INGERSOLL RAND302 344 13.9%436/220
HINDUSTAN ZINC793 890 12.2% 1,119/202
IGATE SOLUTIONS211 233 10.4%284/145
M&M699 763 9.2%769/351

Zee Telefilms (Zee), India's leading broadcaster, declared its results for 2QFY07 on Thursday. The company registered an impressive topline growth of 38% YoY for the quarter, while the margins were under pressure on the back of losses from the new businesses (majorly Zee Sports) and investments in the newer business. Operating margins tumbled by as much as 1000 basis points over corresponding previous quarter; consequently the profitability of the company was under pressure. We believe that the company is in investment phase, the benefits of which will be realized with a lag. Given, the fact that the business is highly scaleable, the yield from the initiatives will add to the profitability. DTH (direct-to-home) segment is expected to growth at a faster clip and Zee is well placed to capitalized on the same. The stock closed the week with gains of 4%. Other media stocks

Top losers during the week (BSE A)
CompanyPrice on
Oct 20 (Rs)
Price on
Oct 27 (Rs)
%
Change
52-Week
H/L (Rs)
ASAHI INDIA122113-7.4%130/69
TVS MOTOR117108-7.7%187/77
NICHOLAS PIRAMAL241230-4.6%300/150
RAYMOND462443-4.1%625/289
MRF LTD4,456 4,284 -3.9%4,770/2,025

With the BSE Sensex once again zeroing in on the 13k mark, it will not be surprising to see increased volatility at these levels. However, the current rally is a trifle different from the previous one in the sense that not many companies as well as sectoral indices have yet tested the levels they last tested in the previous rally. In other words, most of them are still a fair distance off from their 52-week highs. Though this is comforting from a valuation point of view, we still believe that overall, the valuations still look expensive from a medium term perspective. But if you are in the game for a long-term, then quite a few stocks look capable of rewarding investors with sizeable gains.

Flow of results is likely to continue unabated next week and investors could do well to avoid investing in companies on the basis of just one quarter of good performance. On the contrary, it will be a good time to enter into those stocks that have suffered on account of some temporary blip and not a fundamental flaw. Speculators have a tendency to behave in extremes and punish such stocks as if some fundamental flaw has crept in. Long-term investors can certainly take advantage of such behaviour.


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