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How much is too much? - Views on News from Equitymaster
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  • Nov 11, 2006

    How much is too much?

    For the third week in a row, both the benchmark indices ended above breakeven, albeit, the sailing was not as smooth as the preceding week. Just as they were threatening to end flat or even in the negative, the last day rally bought the indices back into the positive and enabled both the benchmarks (BSE-Sensex and S&P CNX Nifty) to edge higher by 1% each.

    The week's proceedings commenced on a positive note as markets ended higher on Monday and extended the positive ending streak to four days. Barring a few minutes in the morning, the indices never really threatened to go below the break even, thus indicating the optimism among participants. However, the positive ending streak was snapped over the next two days as investors chose to book profit and take some money off the table, thus leaving the indices in the red on both Tuesday as well as Wednesday. Bulls were back in contention on the next two days and what started off as a saunter on Thursday really turned into a canter on Friday as markets ended comfortably in the positive.

    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 15 bn. Domestic mutual funds (MFs), on the other hand, turned out to be net sellers to the tune of Rs 1.1 bn.

    Net investments
    (Rs m) FIIs MFs Total
    3-Nov-06 2,274 777 3,051
    6-Nov-06 4,228 1,643 5,871
    7-Nov-06 3,355 (150) 3,205
    8-Nov-06 (62) (2,749) (2,811)
    9-Nov-06 5,269 (711) 4,558
    Total 15,064 (1,190) 13,874

    As regards sectoral indices, this week, it was the BSE Bankex that soared by 4%. The strong momentum in ICICI Bank (the company has a 41% weightage on the bankex) helped propel the index as the stock gained 8% over the week, thus finding a place among top five gainers on the Sensex. The bank, which is one of the best positioned to take advantage of the retail growth story that has been unraveling over the past few years, has reported robust Q2FY07 numbers and investors seem to be rewarding it for its performance. HDFC Bank, the other major contributor to the bankex, also edged higher by 4% during the week and played its part in further pushing the bankex higher.

    The PSU and Auto index were the worst performers on the BSE as they edged lower by 1% each. While weakness in refining and marketing majors like BPCL, HPCL and IOC led to the decline in the PSU index, decline in the fortunes of leading auto companies like Hero Honda and Maruti, led to a fall in auto index.

    Key indices over the week
    Index As on November 03 As on November 10 % Change
    BSE Bankex 6,503 6,737 3.6%
    BSE HEALTHCARE 3,673 3,766 2.5%
    BSE IT 4,760 4,859 2.1%
    BSE MIDCAP 5,494 5,596 1.9%
    BSE METAL 9,062 9,220 1.7%
    BSE FMCG 2,041 2,073 1.6%
    BSE SMLCAP 6,473 6,505 0.5%
    BSE OIL AND GAS 6,318 6,264 -0.9%
    BSE Auto 5,382 5,324 -1.1%
    BSE PSU 6,119 6,051 -1.1%

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

    Software stocks closed mixed with gains seen in Infosys (2%) and TCS (1%). On the other hand, selling was witnessed in i-flex and HCL Tech (each 2% down). Infosys was also among the leading gainers from the Nifty. This buoyancy in the tech bellwether seemed to flow from reports that the company's shareholders have approved of the sponsored issue of 30 m ADRs. This would entail the company's shareholders in the Indian markets to convert their holdings at the price of its ADRs listed on the NASDAQ, which is generally at premium to the domestic stock price. Infosys' stock has, in fact been amongst the top gainers over the past month, thus aiding a large part of the rally as seen in the Indian benchmark indices during this period. The strong offshoring momentum as reiterated by the managemnet and the consequent robust performance during the second quarter has also aided the company's stock. Other software stocks

    Top gainers during the week (BSE A)
    Company Price on
    Nov 3 (Rs)
    Price on
    Nov 10 (Rs)
    H/L (Rs)
    BSE Sensex 13,131 13,283 1.2% 13,304/8,265
    S&P CNX NIFTY 3,805 3,835 0.8% 3,842/2,481
    HCL INFOSYS 125 158 26.4% 279/116
    APOLLO HOSPITALS 453 538 18.8% 589/340
    STERLING BIOTECH 125 147 17.6% 157/87
    INDUSIND BANK 43 49 14.0% 64/27
    WELSPUN GUJ 71 80 12.7% 104/47

    M&M, India's largest manufacturer of UV and tractors, gained 7% for the week and emerged as one of the highest gainers. The interest the stock generated was a result of a signing of JV agreement between the company and Renault, one of Europe's leading car manufacturers. As per the 50:50 JV agreement, both the companies will build a new greenfield car plant that will have the capacity to thrash out 5 lakh cars per annum by 2012. This is over and above the investments that both the companies have made at M&M's existing plant in Nashik, where Logaan, Renault's extremely popular mid-size car is getting ready to be launched by mid-2007. This agreement is likely to give M&M a toehold in the fast growing passenger car market of India. Besides Renault, its associate company, Nissan, has also evinced interest in using the facility for producing cars for the local market. Interestingly, Nissan had earlier entered into talks with Suzuki for building a new car facility in India for joint production of cars, which now stands cancelled. Other auto stocks

    Top losers during the week (BSE A)
    Company Price on
    Nov 3 (Rs)
    Price on
    Nov 10 (Rs)
    H/L (Rs)
    BPCL 412 364 -11.7% 130/69
    HPCL 334 299 -10.5% 187/77
    BAJAJ AUTO 2840 2597 -8.6% 300/150
    FINOLEX IND 97 90 -7.6% 625/289
    IOC 523 484 -7.5% 4,770/2,025

    Suzlon Energy gained 9% during the week and also emerged as among the highest gainers on Nifty. This buoyancy was seemingly fueled by reports that the company, in line with its global expansion strategy, is looking to double the capacity of its US blade manufacturing plant and also set up an additional gearbox facility at its China plant. Apart from de-risking revenues from India, which is also one of the fastest growing markets for Suzlon, the increased global foray will help the company grow faster in the future considering the highly deregulated nature of these markets. In fact, the past six months have seen Suzlon make deeper inroads into the global wind energy markets. The company's export market has grown to include Brazil, Italy and Portugal, in addition to its established market presence in Australia, China, South Korea and US. Apart from the need to reduce pollution levels globally through use of renewable energy sources, increasing cost effectiveness of wind power is also the reason for rapid growth in capacities worldwide. This, we believe, is a long-term positive for the company. Other engineering stocks

    With markets scaling new highs every week, it won't be surprising to see increased volatility at these levels. While we continue to find value in select good quality mid caps, most of the large caps look adequately valued from a near term perspective. Please bear in mind that markets always tends to fluctuate between excessive optimism and unwanted pessimism and it is upto the individual investor to base his investment decisions after thorough analysis and careful evaluation of the risks involved. This way, he can prevent much of his capital from getting eroded by the vagaries of the market.



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