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Happy ending! - Views on News from Equitymaster
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  • Oct 30, 2004

    Happy ending!

    It was a pleasant climax to what has rather been a roller-coaster ride for investor during the month. After two weeks of cautious trading on the Indian bourses during which the indices seemed to have consolidated at lower levels, this week saw them resume their upward journey. The indices gained ground (0.5%) this week aided by positive investor sentiments, which was a factor of a good India Inc. performance scorecard for the September 2004 quarter. Corporate India has continued to dole out largely impressive results, which seems to have given the FIIs enough confidence to continue to remain invested in the country (see chart below).

    Indian bourses continued this week from where they left off last week i.e. on a weak note. This was owing to the apprehensions pertaining to a possible interest rate hike in the Monetary Policy (due on Tuesday), which could affect the investment demand from the corporate sector, in turn slowing down the pace of growth of the Indian economy. Further, oil prices, which were trading close to the US$ 55 per barrel mark, clouded investor sentiments as this, if continued for long, could threaten the pace of global economic recovery, especially of oil importing nations like India and China. However, Tuesday onwards, backed by good India Inc. results, investor sentiments were restored as they once again went on a buying spree, which saw the Sensex rally almost 180 points (from Tuesday’s intra-day lows) until Thursday, before some profit booking emerged on Friday.

    The strength witnessed during the week could also be attributed to two other important factors. One being the fact that India’s apex bank, the RBI, opted to keep the long-term interest rates (bank rate at 6%) unchanged in the Monitory Policy declared on Tuesday. This provided the markets enough reason to cheer, as this is likely to help maintain the growth of the economy and, at the same time, help the nascent investment cycle to realise its full potential. The RBI, however, hiked the repo rate by 25 basis points to 4.75%, which can be assumed as a signal of a shifting stance towards a reversal in interest rates trend. Apart from this, another important sentiment booster was the surprise stronger than expected oil inventory data that led to global crude oil prices crashing by as much as 5% on Wednesday evening (8% during the week). This led to a strong rally in stock markets across the globe.

    Key gainers over the week (NSE-50)
    Company Price on
    Oct 22 (Rs)
    Price on
    Oct 29 (Rs)
    H/L (Rs)
    BSE-SENSEX 5,641 5,672 0.6% 6,250 / 4,228
    S&P CNX NIFTY 1,780 1,787 0.4% 2,015 / 1,292
    DABUR 74 81 9.7% 98 / 60
    INFOSYS 1,780 1,906 7.1% 1,958 / 1,031
    SAIL 46 49 6.6% 56 / 21
    BHARTI TELE 149 157 5.3% 189 / 78
    MARUTI 358 376 5.1% 600 / 286
    Note: Click on the link above to read our view on the company/sector

    Coming back to the Indian stock markets, the current week was primarily dominated by corporate results, which decided the stock movements on the bourses. While Infosys continued its run on the bourses on the back of the usual better-than-expected results and the enhanced guidance declared earlier in the month and better prospects going forward, the others in the gainers pack (see table above) were all propped up on the back of good September quarter results.

    Key losers over the week (NSE-50)
    Company Price on
    Oct 22 (Rs)
    Price on
    Oct 29 (Rs)
    H/L (Rs)
    GUJARAT AMBUJA 359 342 -4.8% 370 / 229
    TATA POWER 314 300 -4.5% 450 / 213
    HPCL 322 308 -4.5% 542 / 262
    GRASIM 1,132 1,086 -4.0% 1,317 / 756
    IPCL 195 188 -4.0% 240 / 106
    Note: Click on the link above to read our view on the company/sector

    Among the top losers this week, while all of them, barring Tata Power, lived upto market expectations as far their quarterly performance is concerned, the weakness could be attributed to some amount of profit booking in these stocks. In the case of Gujarat Ambuja, however, reports of weakening cement prices in the state of Gujarat, the trickle down effect of which had started to become visible on the Mumbai cement market, seemingly led to investors exercising caution. However, notwithstanding such short-term volatilities, from a medium-term perspective, we expect cement demand to grow at more than 8% in the country. Prices are also expected to be higher by more than 5% on an average. Consequently, Gujarat Ambuja is likely to continue to benefit.

    Going forward, now that the results season is over, the focus will shift from individual companies’ performance to more macro views (as to cues about what next for the company) and the economy as a whole. Going into next week, the markets will open with a fresh perspective. The caveat here, however, would be the fact that crude prices, notwithstanding the recent correction, continue to hover in the US$ 50 per barrel range, which remains a cause for concern. Further, with China having increased its efforts at reining its galloping economy by raising interest rates this week by 27 basis points (0.27%), should be taken as a precursor to the (intended) impending slowdown, which is a warning for the current multi-year high ruling prices of commodities like copper, aluminium and steel among others.

    To conclude, we would once again like to re-iterate that at the current juncture, the P/E valuation of the benchmark index is at about 13 times its trailing 12-month earnings, which despite not being one of the most lucrative, continues to remain fairly attractive. It must be noted that the Indian stock markets have usually commanded an average P/E valuation of about 15x-16x, a fact justified by the CAGR earnings growth of approximately 18% of benchmark index companies over the last 8 years. Of course, while the story of triple digit returns is over, considering the developments in the form of the reforms process currently underway in the country, the environment looks conducive for growth for corporate India and thus we believe that Indian equities would continue to deliver decent returns over the long term. The only caveat here for an investor is the detection of an investment candidate with good management and business model that would reward the investor. Happy and safe investing!



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