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Big bang recovery! - Views on News from Equitymaster
 
 
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  • Nov 12, 2005

    Big bang recovery!

    The festivities for Indian stock market investors went on, as the recovery on the Indian bourses continued this week, with the benchmark indices notching gains of about 5%, and no prizes for guessing who is in the driver's seat this time around also! Further, the investor interest this week went beyond large-caps, as is evident from the stronger (about 6%) gains witnessed in the BSE Mid Cap and BSE Small Cap indices.

    The bull party continued this week, with another almost 400-points (about 5%) gains registered by the Sensex. It must be noted that similar gains were logged in last week also, thus making it two consecutive weeks of gains for the Indian stockmarkets, with the Sensex recovering almost 11% from its lows made just a fortnight ago (see chart above). The markets opened this week on a strong note and proceeded to trade higher, with the bulls hitting a century by the close. The story was not much different on Tuesday, with another 100+ points rally registered by the Sensex. However, post that, the markets went into a sort of consolidation mode, as one-sided northward movement of the past few trading sessions gave way to intense volatility over the next couple of trading sessions. Bears tried to spoil the party here, as they pressed the sell button every time markets tried to gain ground. But the bulls seemed adamant this time around, as they broke free from this range-bound movement and marched ahead on Friday. The benchmark indices gained about 2% on Friday.

    Of course, this rally since the last couple of weeks wouldn't have been possible without the return of Foreign Institutional Investors (FIIs) money into Indian equities. It must be noted that the month of October 2005 had seen FIIs pull out almost US$ 850 m from Indian equities, which had led to the markets collapsing by 13%, despite domestic mutual funds (MFs) pumping in close to US$ 650 m in this period. However, now that the FIIs are back with a bang (see chart above) with their purse strings loosened once again, it is time for domestic MFs to book some profits. While FIIs have pumped in close to US$ 350 m dollars into Indian equities in November 2005 so far, domestic MFs have been net sellers to the tune of US$ 70 m (over Rs 3 bn).

    Top gainers over the week (NSE-50)
    Company Price on
    Nov 2 (Rs)
    Price on
    Nov 11 (Rs)
    %
    Change
    52-Week
    H/L (Rs)
    BSE-SENSEX 8,073 8,471 4.9% 8,822 / 5,878
    S&P CNX NIFTY 2,419 2,549 5.4% 2,669 / 1,845
    BPCL 378 435 15.0% 475 / 339
    BHEL 1,139 1,294 13.6% 1,315 / 532
    HERO HONDA 716 806 12.6% 840 / 430
    ABB 1,665 1,870 12.3% 1,890 / 780
    DR. REDDY 847 939 10.9% 975 / 605

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

    • BPCL (up 15%) was the biggest gainer amongst Nifty stocks this week. Other oil marketing companies' stocks were also in the reckoning this week, with HPCL and IOC gaining about 10% each. These stocks had been facing rough times over the last few quarters, as rising crude oil prices and their inability at passing on the same to consumers affected their profitability severely. However, with crude oil prices having cooled off and now well below the US$ 58 per barrel mark, the pressure on oil marketing companies related to under-recoveries and also to a certain extent on ONGC (up 6% during the week) which has to bear the subsidy burden, has been reduced. Further, the proposed issue of oil bonds to oil companies to compensate for their losses also helped matters. These developments provided enough reason for investors to lap up energy stocks

    • Pharma stocks attracted significant investor interest during the week. While Dr Reddy's (up 11%) made it to the key gainers list, the other big winners included Ranbaxy (up 9%) and Cipla (6%). Positive sentiments towards domestic pharma major, Dr.Reddy's, were aided by the news that the company will be acquiring Roche's active pharmaceutical ingredients (API) business at its manufacturing site in Mexico. This deal is worth US$ 59 m and Dr.Reddy's will acquire the working capital as well as the supply contracts. This API business is involved in the manufacturing and sale of APIs to Roche and other innovator companies and is expected to provide a boost to Dr.Reddy's custom pharmaceuticals services (CPS) going forward. Currently, the company's CPS business stands at US$ 10 m and this acquisition is expected to help the business grow to US$ 100 m in the next 18 months.

    • Engineering stocks too witnessed significant buying interest during the week, with BHEL emerging amongst the top gainers this week, despite there being no specific development, apart from it bagging a Rs 1.3 bn order from IOC for the purpose of setting up a co-generation power plant. However, the company is envisaging increasing its overseas orders from Rs 10 bn (FY05), which forms about 10% of the company's total turnover, to Rs 40 bn in the next 4 years. BHEL is looking for projects in Africa, South-East Asia and West Asia. The company is also gearing up to enhance its annual manufacturing capacity from the present 6,000 MW to 10,000 MW by FY07. This would involve an investment of around Rs 8 to Rs 10 bn. It must be noted that the company has garnered a good reputation in the global markets considering its recent large wins in Indonesia (US$ 100 m order) and Oman (US$ 200 m order).

    • Aluminium majors, Hindalco (up 8%) and Nalco (up 10%), were in considerable reckoning this week, seemingly on the back of the hike in domestic aluminium prices last week. It must be noted that the last couple of months have seen international spot aluminium prices (on the London Metal Exchange) rising by about 15%, which is reflected in the domestic markets, albeit with a lag. This move is a positive, as it will help shore up the bottomlines of aluminium companies on the back of improved realisations.

      Top losers over the week (NSE-50)
      Company Price on
      Nov 2 (Rs)
      Price on
      Nov 11 (Rs)
      %
      Change
      52-Week
      H/L (Rs)
      SAIL 54 53 -2.3% 70 / 47
      DABUR 167 165 -0.8% 189 / 80

    To conclude, while the volatility on the Indian bourses is here to stay, now that the Indian stockmarkets are so heavily dependent on foreign money, we believe that investors with a long-term approach are best placed to ride the India story. Trying to time the markets would be futile, as markets have this uncanny habit of throwing up surprises. Thus, we would continue to recommend stocks with sound business models and justifiable valuations and the fate of which is not dependent on whether they are on the 'buy list' of FIIs or not. We continue to believe that let fundamentals and value dictate investment decisions, not FII fund flows.

     

     

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