The faith's not dented yet!

Basking in the aftermath of yet another set of robust results from India Inc and a rather benign monetary policy, the benchmark indices notched impressive gains for the second week in a row. For the week ended Nov 3 2006, both the 'BSE-Sensex' as well as the 'Nifty' gained by 1.7% and 1.8% respectively.

The week's proceedings commenced on a buoyant note as gains in heavyweights from sectors such as auto, banking and telecom ensured that the Sensex closed above 13k for the first time in history. With Reserve Bank of India (RBI) expected to announce its mid-term monetary policy on Tuesday, investors were found groping for direction, as markets remained largely volatile. The rather harmless stance taken by the central bank finally managed to calm the markets down and enabled them to pare some of its losses at the fag end of the day. However, there was no stopping the markets for the next three days as gains in heavyweights, especially energy stocks like ONGC and Reliance made sure that the indices edged higher every single day.

As far as the institutional activity on the bourses was concerned, Foreign Institutional Investors (FIIs) were net buyers this week to the tune of nearly Rs 27 bn. Domestic mutual funds (MFs), on the other hand, turned out to be net buyers to the tune of Rs 9.8 bn.

As regards sectoral indices, this week, it was the BSE Oil & Gas index that soared by 5.6%. This is seemingly on the back of the fact that sector bellwethers like Reliance and ONGC, which account for nearly 80% of the total weightage of the index have edged higher by 5% and 11% respectively for the week. Gains in ONGC could be attributed to its proposed tie-ups with Russian oil giants for oil exploration as also the possibility of OVL acquiring one block each in Iran and Angola from a Nordic company. Reliance, the other major gainer, garnered investor interest on the back of increased development investment into its KG basin gas fields, thus confirming its earlier statement of a much higher than expected gas reserves.

Among the indices that lost favour, BSE IT emerged the worst performer as it lost nearly 2%. After edging significantly higher in the earlier weeks, the sector seems to be undergoing what could be termed as a bout of profit booking.

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

Earlier in the week, RBI announced its mid-term review of the annual monetary policy for 2006-07. The central bank, while keeping the bank rate and reverse repo rates stable at 6%, raised the repo rate by 25 basis points (0.25%) to 7.25%.

The overall stance of the mid-term policy is outlined as follows:

• To ensure a monetary and interest rate environment that supports export and investment demand in the economy - so as to enable continuation of the growth momentum while reinforcing price stability, with a view to anchoring inflation expectations.
  
  
• To maintain the emphasis on macroeconomic and, in particular, financial stability.
  
  
• To consider promptly all possible measures as are appropriate to the evolving global and domestic situation.

As part of this mid-term review, the RBI also talked of increasing difficulty in the global economy with respect to identifying the symptoms of overheating. It stated that, “Globally, inflation risks remain, though incipient at the current juncture. While headline inflation rates are moderating, core inflation, especially in the US, has remained firm, indicating that upside pressures from oil and commodity prices persist across advanced and emerging economies, especially at the producer level. Potential risks from the possible full indirect effects of elevated and uncertain oil/commodity prices, some possible tightening of global production capacities and the remaining overhang of global liquidity continue to weigh upon the setting of monetary policy worldwide.”

As per a leading business daily, ONGC, the state owned Indian exploration giant, is looking to enter into a joint venture with either of the State-owned Russian oil companies Rosneft or Gazprom for the purpose of acquiring oil and gas assets. These joint ventures would look for properties in Russia and not India. In the proposed joint venture, while the Russian company would hold 51% stake, the balance 49% will be held by ONGC. ONGC's overseas arm OVL and Rosneft are already partners in the Sakhalin-I oilfield operated by ExxonMobil. Considering the fact that India imports around 70% of the oil that it consumes, oil companies in India are looking to acquire assets abroad to meet the growing energy needs. Buoyed by the news, investors seemed to have made a beeline for the ONGC counter as the stock emerged as one of the highest gainer on not just the benchmark indices, but also on the broader 'BSE A group' index.

Some of the key auto companies announced their October sales numbers during the week. While motorcycles continued with their double-digit gallop, four wheeler sales, especially CVs seemed to have finally taken some breather. Tata Motors, a proxy for the Indian four-wheeler industry announced lukewarm numbers. Total vehicle sales have reported a 5.6% YoY growth, with commercial vehicles in the domestic market growing at 18.6% YoY. While medium and heavy commercial vehicles sales grew by 14% YoY, light commercial vehicles sales registered a growth of 24% YoY. However, passenger vehicles sales declined by 3% YoY, which was attributed to the fire at Tata Motors' Pimpri car plant. Similarly, export sales dipped by 22% YoY. It must be noted that Tata Motors is India's largest commercial vehicle (M/HCVs and LCVs) manufacturer, with a market share of 62% in FY06 (59% in FY04) and second largest producer of passenger vehicles.

As mentioned earlier, 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 aare 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. Please remember, the key word here is long-term.