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Swinging around 20K!

Nov 3, 2007

The week was marked by volatility as institutional investors alternated between being net buyers and sellers. The Reserve Bank of India (RBI) raised the Cash Reserve Ratio (CRR) maintained by the banks from 7.0% to 7.5% effective from November 10, 2007. This is expected to curb the growth in Reserve money (base money) from the current 24.4% to about 14.9%. However, the RBI did not increase the bank rate, nor lowered the reverse repo rate at which it absorbs excess liquidity from the banks. The US Federal Reserve reduced the Fed funds rate - by 25 basis points to 4.5%.The week began on an enthusiastic note as the Sensex surged 734 points (4%) while the Nifty gained 204 points (4%) on Monday. Tuesday witnessed considerable volatility as the indices oscillated on either side of the previous day's close throughout the day to finally end in the red. The markets regained some of their lost footing as the indices closed above breakeven on Wednesday on the back of buying action in banking and power stocks. Thursday was a repeat of Tuesday as the markets opened on a positive note in the aftermath of the Fed announcing a quarter point rate cut but subsequently slipping into the red on profit booking. Both the Sensex and the Nifty closed in the red (0.6%). Friday witnessed Asian markets across the board, except India, close in the negative. The Sensex gained 252 points (1.3%) while the Nifty gained 66 points (1.1%) on Friday. For the week, the BSE-Sensex appreciated by 3.8% while the NSE-Nifty gained 4%.

On the institutional activity front, between 26th October and 1st November, Foreign Institutional Investors (FIIs) were net buyers to the tune of Rs 9 bn while mutual funds bought equities worth Rs 4 bn.

(Rs m)MFs FIIs Total
26-Oct8,314 (2,568)5,746
29-Oct4,211 10,474 14,685
30-Oct(5,336)(3,033)(8,369)
31-Oct(111)2,280 2,169
1-Nov(3,580)1,806 (1,774)
Total3,498 8,959 12,457

On the sectoral indices front, BSE Bankex (up 9%) and BSE PSU (up 8%) featured among the key gainers, while the BSE Auto Index (4%) and BSE FMCG Index (3%) were among the losers.

IndexAs on October 26As on November 2% Change
BSE BANKEX10,274 11,242 9.4%
BSE PSU9,227 9,930 7.6%
BSE OIL AND GAS11,103 11,736 5.7%
BSE METAL16,745 17,694 5.7%
BSE SMLCAP9,551 9,742 2.0%
BSE MIDCAP7,921 8,022 1.3%
BSE HEALTHCARE3,886 3,934 1.2%
BSE IT4,636 4,635 0.0%
BSE FMCG2,129 2,062 -3.1%
BSE AUTO5,617 5,423 -3.5%

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

Software stocks closed mixed with Infosys (3%) leading the pack of gainers, while TCS (5%) and Satyam (3%) closed in the red. Infosys has decided to open a separate business unit (SBU) for India, which has been contributing a mere 1% to its revenues. The company, which so far had not attached much importance to the domestic market on grounds of low margins, will open the India Business Unit in 3QFY08. The company has also turned its attention to new markets such as Australia, China, Japan, West Asia, Canada, South America and Latin America. This is a good move primarily on two counts. First, focusing on newer markets will enable Infosys to reduce its dollar denominated billings. Secondly, by focusing in domestic segment, the company will be able to take benefits of the emerging domestic IT outsourcing market.

Energy stocks closed strong with MRPL (35%), Reliance Petroleum (33%) and ONGC (18%) leading the pack of gainers. ONGC achieved a topline growth of 10% YoY during 2QFY08 on the back of higher production and increased realisations. EBITDA margin expanded to 54.6% during 2QFY08, up from 50% in 2QFY07 due to lower raw material and staff costs. ONGC's staff expenditure decreased by 42% YoY in 2QFY08, as the company had included Rs 3 bn on account of Golden Jubilee and additional annual incentive in 2QFY07. The subsidy burden on the company was Rs 38 bn in 2QFY08, down from Rs 50 bn in the corresponding quarter last year. A part of the decline can be attributed to the strengthening of the rupee, as subsidised oil received by the downstream companies is billed in US dollars and hence was cheaper in rupee terms. Bottomline registered a growth of 22% YoY during 2QFY08.

Top gainers during the week (BSE A)
CompanyPrice on
October 26 (Rs)
Price on
November 2 (Rs)
%
Change
52-Week
H/L (Rs)
BSE SENSEX19,243 19,976 3.8%19,276 / 12,316
S&P CNX NIFTY5,702 5,932 4.0%5,737 / 3,555
NATIONAL FERTILISER42 67 58.5%96 / 37
JINDAL STEEL8,382 12,661 51.0%849 / 133
POWER GRID CORP103 149 44.8%726 / 430
RELIANCE NATURAL RESOURCE99 142 43.0%802 / 461
MRF LTD5,624 7,867 39.9%8,490 / 1,741

Engineering stocks closed on a high with L&T (15%) and BHEL (up 12% each) featuring among the key gainers. BHEL achieved a topline growth of 19% YoY in 2QFY08 compared to the corresponding quarter in the previous fiscal and 20% YoY in 1HFY08. Growth was led by 22% YoY growth in 'power' segment sales. Operating margins expanded by 3.8%, owing to lower raw material and staff costs (both as percentage of sales). Other income grew by 195% YoY, which was led by an income tax refund of Rs. 2.7 bn. This led to a 91% YoY growth in net profits during the quarter. Order backlog stands at Rs 726 bn (4.2 times FY07 sales) at the end of September 2007.

Top losers during the week (BSE A)
CompanyPrice on
October 26 (Rs)
Price on
November 2 (Rs)
%
Change
52-Week
H/L (Rs)
NIIT139113-18.5%172 / 45
TATA ELXI290250-13.7%365 / 221
MARUTI SUZUKI1,1811,021-13.5%1,252 / 713
HEXAWARE TECH11199-10.8%205 / 97
VSNL568510-10.2%600 / 342

We have been cautioning investors about keeping their focus on the fundamentals of the companies and not unduly worrying over the market movements, as excitement is the enemy of investors. But if rapidly rising markets still tempt you, dear reader, we refer you to Warren Buffett's 2004 letter to shareholders. He mentions that if investors insist on timing the market, they should be fearful when others are greedy and greedy when others are fearful. The markets are greedy right now, perhaps this is the right time to be fearful?

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