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Downhill from the record highs... - Views on News from Equitymaster
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  • Nov 24, 2007

    Downhill from the record highs...

    Indian markets felt the jitters as the US economic outlook, credit squeeze, weakening dollar and surging oil prices continued to plague global equity markets. Four out of the five sessions during the week ended in the red as Foreign Institutional Investors (FIIs) turned out to be net sellers. Thus, for the week ended November 23, 2007 the BSE-Sensex lost 4.3% while the NSE-Nifty lost 5%.

    The week began on a cautious note on weak global cues as the Sensex declined by 65 points while the Nifty gained 1 point on Monday. Tuesday offered no respite from the selling pressure as energy, engineering and construction sectors found no takers and the day ended in the red by 352 points on the Sensex and 127 points on the Nifty. The movement of the benchmark indices since the start of the trade on Wednesday was unidirectional, as after a weak start, profit booking in the index heavyweights showed no signs of abating for the rest of the session. The day ended with a whopping 678-point loss on the Sensex. Though the close was in the red, buying at lower levels in the index heavyweights in the final trading hour propelled the indices to pare substantial losses on Thursday. Power, pharma, software and telecom sectors registered the highest gains. Friday witnessed the only session during the week when the benchmark indices ended in the green with the Sensex closing higher by 327 points and the Nifty up by 90 points.

    On the sectoral indices front, BSE PSU (10%), BSE FMCG (5%) and BSE BANKEX (5%) featured among the key losers.

    Index As on November 16 As on November 23 % Change
    BSE PSU 10,571 9,502 -10.1%
    BSE FMCG 2,231 2,111 -5.4%
    BSE BANKEX 11,003 10,414 -5.4%
    BSE METAL 17,498 16,594 -5.2%
    BSE OIL AND GAS 12,480 11,987 -3.9%
    BSE IT 4,159 4,017 -3.4%
    BSE MIDCAP 8,512 8,229 -3.3%
    BSE SMLCAP 10,381 10,171 -2.0%
    BSE HEALTHCARE 3,885 3,811 -1.9%
    BSE AUTO 5,284 5,257 -0.5%

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

    Steel stocks closed weak with SAIL (4%) and Tata Steel (3%) leading the pack of losers. Tata Steel is coming out with a mega rights issue of about Rs 100 bn to repay the 'bridge loans' raised for funding acquisition of British steel giant Corus. Tata Steel UK has raised 3.15 m pounds of debt for financing the acquisition. The issue, opening on November 22, will include 121.8 m shares of Rs 300 each to be issued on rights basis in the ratio 1:5 and Cumulative Compulsory Preference Shares (CCPS) of Rs 100 to be converted into equity on September 1, 2009. The issue will close on December 21 and the record date for the issue was November 7, 2007. The rights issue will fetch Rs 36.54 bn while CCPS will bring in Rs 60 bn. The company's overall borrowings during FY07 increased by over 600% from Rs 33.77 bn to Rs 249.26 bn, mainly due to its acquisition of Corus. Tata's decision to raise funds from rights issue will result in enlargement of its equity by 20% after the rights issue and 35% after conversion of CCPS into equity. However, this enlargement of equity base may impair Tata Steel's ability to maintain a high rate of dividend to its shareholders.

    Stocks of the aluminium companies closed weak with NALCO (19%) and Hindalco (8%) leading the pack of losers. Hindalco is planning to expand its brownfield plants while creating new greenfield projects aimed at taking the overall aluminium generation capacity to about 1.5 to 1.6 million tonnes per annum (MTPA). This would involve a capital expenditure of about US$ 7 to US$ 7.5 bn by 2011. The aluminium usage is currently limited to industrial usage and electrical wires and gradually expanding to new areas such as automotives, two wheelers, aircraft, rail systems, and transport systems. This would fuel the growth of downstream business. The expansions would help the company meet the growing demand. The industry is growing at the rate of about 10% to 12% and this trend is expected to continue. It would also compliment the company's inorganic growth led by strategic acquisitions.

    Top gainers during the week (BSE A)
    Company Price on
    November 16 (Rs)
    Price on
    November 23 (Rs)
    H/L (Rs)
    BSE SENSEX 19,698 18,853 -4.3% 20,238 / 12,316
    S&P CNX NIFTY 5,907 5,609 -5.0% 6,012 / 3,555
    THOMAS COOK INDIA 58 74 27.8% 80 / 46
    JINDAL STAINLESS 170 204 19.7% 224 / 103
    NIRMA LTD. 166 196 18.1% 244 / 143
    D-LINK INDIA 84 99 16.9% 108 / 59
    JINDAL STEEL 10,546 12,096 14.7% 13,850 / 1,889

    Oil refiners closed week with HPCL (12%), BPCL (8%) and RIL (2%) featuring among the key losers. As per a leading business daily, RIL plans to reduce LPG production by 40% to around 1.6 million tons per annum (MTPA) from 2QFY09 from its Jamnagar refinery, which was recently granted the export oriented unit (EOU) status. It may be noted that LPG has to be imported by the PSU oil marketing companies to meet the increasing domestic demand and that RIL is the largest producer with a capacity of 2.67 MTPA. This is a positive development for the company as domestic LPG results in heavy under recoveries for the producers.

    Top losers during the week (BSE A)
    Company Price on
    November 16 (Rs)
    Price on
    November 23 (Rs)
    % Change 52-Week
    H/L (Rs)
    IOC 618 497 -19.6% 650 / 370
    DREDGING CORP 1,275 1,031 -19.2% 1,356 / 461
    NALCO 409 334 -18.5% 441 / 193
    RCF 81 66 -17.9% 85 / 33
    BONGAIGAON R 105 87 -17.0% 117 / 39

    With the markets repeatedly registering losses over past few sessions, it is perhaps a suitable time to remind oneself of what Warren Buffett mentions in Berkshire Hathaway's owner's manual. He says, "Overall, Berkshire and its long-term shareholders benefit from a sinking stock market much as a regular purchaser of food benefits from declining food prices. So when the market plummets - as it will from time to time - neither panic nor mourn. It's good news for Berkshire." The key of course is whether you are a long-term shareholder in the companies you seek to hold, dear reader. If you are, this might just be the time to buy.



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