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Demolition men! - Views on News from Equitymaster
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  • Oct 29, 2005

    Demolition men!

    At the current juncture, these would be the best words to describe Foreign Institutional Investors (FIIs) who have been selling equities, not just in India but also across the globe, consequently leading to the demolition of positive investor sentiments and eroding investors' wealth by the hour. The Indian indices continued their downward spiral this week also, amidst heavy unloading by FIIs. The benchmark indices lost about 5% each, with selling witnessed across sectors. Though domestic mutual funds lent support, they seemed feeble in front of the FII might. Thus, post this week's loss, the BSE-Sensex has lost about 13% within a month from its lifetime highs!

    The turmoil on the bourses continued this week also, with the markets losing significant ground again this week. Markets began Monday on a feeble footing and proceeded to trade lower, as profit booking continued unabated throughout the trading session, though short bouts of intermediate buying were witnessed. This tug-of-war between the bulls and the bears continued well into Tuesday and Wednesday's trade, when every rise, sometimes marginal, was countered with fresh intensified selling. Nonetheless, while Tuesday saw the markets gain some ground, the trend reversed Wednesday onwards. However, Thursday and Friday clearly belonged to the bears, as the bulls capitulated in the face of massive profit booking across the board, with the Sensex losing almost 300-points in these two trading sessions. Thus, at the end of the carnage, the benchmark indices had lost about 5% each. The mid-cap and small-cap indices lost about 4%. It must be noted that the F&O settlement on Thursday played a critical role in this week's market behaviour.

    As is now common knowledge, the men carrying out this demolition drive since the last few weeks have been none other than the FIIs. While our domestic mutual funds (MFs) managers have been buying, sometimes in large chunks, at every correction, as mentioned above, their might is not enough to prevent the downslide. To put this into perspective, since post the day when the Sensex hit its lifetime high (October 5, 2005), while FIIs have been net sellers to the tune of Rs 38 bn (approx US$ 850 m), domestic MFs have bought Rs 25 bn (approx US$ 560 m) worth of equity. One of the reasons explaining this sudden outflow of money has been the sharp depreciation of the rupee in the month of October 2005 (about 2.7%), which is in sharp contrast to the trend witnessed over the previous several months, which saw the rupee appreciate about 7% against the US$.

    Top gainers over the week (NSE-50)
    Company Price on
    Oct 21 (Rs)
    Price on
    Oct 28 (Rs)
    H/L (Rs)
    BSE-SENSEX 8,069 7,686 -4.8% 8,822 / 5,649
    S&P CNX NIFTY 2,444 2,316 -5.2% 2,669 / 1,777
    TATA CHEM 178 182 2.2% 211 / 125
    GLAXO 855 874 2.2% 925 / 639
    HDFC 924 939 1.7% 1,081 / 624
    L&T 1,326 1,344 1.4% 1,599 / 798

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

    • Bharti Tele, India's leading cellular services provider, reported yet another quarter of strong performance. On the back of a robust growth in GSM subscriber base, the company has reported strong growth in both the topline (up 44% YoY) and the bottomline (up 73% YoY) during the quarter. Bharti crossed the 14 m-customer mark for its mobile services in September 2005 and has cornered a share of 27.7% of the all-India GSM subscriber base. The stock ended the week relatively strong, down only 0.5%, as the stock shot into considerable limelight on Friday on the back of the news that global telecom major, Vodafone Group Plc. has picked up a near 10% stake in the company. Telecom stocks this week/month

    • Cement stocks did not find much favour, despite the news that cement prices are expected to rise by Rs 5 to Rs 7 per bag in the current quarter on the back of strong demand from domestic as well as overseas markets. Cement dispatches have been growing across the country steadily over the past few quarters, due to high infrastructure activity and higher exports to Gulf regions. In the southern markets, demand has been high due to the housing sector boom clubbed with IT infrastructure projects. However, it must be noted that raw material prices have been increasing due to rise in prices of limestone and coal, which could be one of the reasons for the price increase. Cement stocks this week/month

      Top losers over the week (NSE-50)
      Company Price on
      Oct 21 (Rs)
      Price on
      Oct 28 (Rs)
      H/L (Rs)
      VSNL 318 273 -14.1% 445 / 161
      NALCO 176 153 -12.9% 209 / 139
      GAIL 258 232 -10.2% 287 / 194
      TATA MOTORS 513 462 -10.0% 577 / 400
      TATA STEEL 367 331 -10.0% 456 / 285

    • M&M, India's largest tractor maker, is slated to acquire 100% of Romania's largest tractor company, Tractorul SA Brasov. The attraction that Tractorul offers is that it serves as a gateway to the EU market, with Romania becoming an EU member country. As regards M&M, this move is in line with its declared strategy of making Mahindra Systems & Automotive Technologies (MSAT) a billion-dollar company. The stock ended the week lower by 3% in line with overall weak market sentiments. Auto stocks this week/month

    • Indian pharmaceutical companies, in order to strengthen their position in the global arena, are scaling up their R&D activities. Among the major recruiters are Ranbaxy, Wockhardt and Sun Pharma. Companies are focusing on new chemical entities, generic variants of existing drugs and new drug delivery systems. Also, contract research is on the upswing. International drug majors like Teva, Ivax and Pliva are also availing services from India due to our cost advantage and reverse engineering skills to develop off-patent drugs. This is a big positive for the industry as a whole as from January 1 2005, the product patent regime has come into force. Pharma stock this week/month

    Going forward, with the key India Inc. results now out of the way, investors would get back to their number crunching game and re-focus on the future of these companies. While the current market valuations of 13 times one-year forward earnings does not seem too expensive, the challenge for India Inc. to deliver from hereon would stand increased, considering a scenario of hardening interest rates and stronger fuel prices. However, we continue to believe that the India story is not over and staggered investments with 3 to 5 years investment horizon is a sound approach to mitigate the impact of most risks. We feel that fundamentals do not change by the day, week or month. If the fundamentals and performance of the company are strong, markets will acknowledge the same in due course of time. Happy and safe investing!



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