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Over the top, again!

Nov 26, 2005

Bulls firmed their grip further on the markets this week as they pushed the indices into a new orbit. Both the Sensex and the NSE-Nifty created new records. For the week, both these benchmark indices notched gains of over 2% each. Apart from large-caps, buying interest was witnessed in mid-cap and small-cap stocks also, as is evident from the gains witnessed in their respective indices. While the BSE Mid-cap Index was up 1.5%, the BSE Small-cap Index ended the week 2% higher. However, it must be noted that both these indices have still a considerable way to go before breaching their previous highs.

The markets began this week on a somber note seemingly on the back of the strong run over the past three weeks, which saw them gain a hefty 13%. Profit booking was witnessed in the first two trading sessions of the week, which may have made the bears assume that the markets are ripe to give back some of their gains. However, this turned out to be only a temporary joyous moment for them as the bulls came back with greater vigour in the following 4 trading sessions (markets were open for 3 hours on Saturday), taking the Sensex past its previous lifetime highs. As usual, the Foreign Institutional Investors (FIIs) played the role of the bulls here as they pumped in significant amount of money into Indian equities. To put this in perspective, in the first four trading sessions of the week, while FIIs' net investment was at Rs 13,646 m, domestic mutual funds (MFs) put in a relative measly 400 m.

Top gainers over the week (NSE-30)
COMPANY Price on Nov 18 (Rs) Price on Nov 26 (Rs) % CHANGE 52-WEEK H/L (Rs)
BSE-SENSEX 8,687 8,889 2.3% 8,912 / 6,015
S&P CNX NIFTY 2,620 2,683 2.4% 2,687 / 1,893
GLAXO 994 1,156 16.3% 1,165 / 665
M&M 409 463 13.3% 465 / 216
VSNL 333 375 12.7% 445 / 161
L&T 1,560 1,694 8.6% 1,715 / 854
COLGATE 252 273 8.3% 276 / 164

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

  • Auto stocks were in considerable limelight this week. This was on the back of reports that the government is contemplating a significant reduction in the excise duty for passenger cars, as a part of the new auto policy. While the normal reduction is expected to be to 16% from the current levels of 24%, for 'small cars', the excise duty is likely to be reduced to 8%. This move, if materialises, will be a positive for auto companies, as this could lead to a significant spurt in volume sales. To put this in perspective, as per the study conducted by the National Council for Applied and Economic Research (NCAER), the demand elasticity ratio is 1.8 times change in price of the vehicle.

  • The Indian banking industry has finally resolved not to lend to corporates below 6.75% interest rate for short-term loans and below 9% for the long-term loans of over 12 years, which is a positive. These 'floor rates' have been fixed at a meeting presided by senior bankers of all the leading banks in the country. While most AAA rated corporates now access short-term loans at 6.25% to 6.5%, the hike will mean a 50 basis points rise in cost of funds for them. At the same time, it will stop the fierce undercutting of rates by banks and provide them a reasonable return over their average cost of funds. However, banking stocks were a mixed bag this week.

    Top losers over the week (NSE-30)
    COMPANY Price on Nov 18 (Rs) Price on Nov 26 (Rs) % CHANGE 52-WEEK H/L (Rs)
    HINDALCO 137 126 -7.5% 164 / 107
    TATA STEEL 370 344 -7.0% 456 / 310
    RANBAXY 397 379 -4.5% 640 / 339
    ZEE TELE 156 150 -3.7% 206 / 128
    SAIL 52 50 -3.3% 70 / 47

  • Steel stocks continued their downtrend in wake of sustained weakness in global steel prices. In fact, China's leading steel company, Baoshan Iron and Steel Company (BaoSteel) has cut prices of its core products by around 10% to US$ 430 a tonne. This move by the sixth-largest steel producer in the fastest-growing economy in the world is on the back of significantly increased production in China (up 19% YoY in October 2005 and up 27% YoY in 2005 to date). This move by the Chinese steel major would hit domestic as well as international prices. It must be noted that steel imported into India is cheaper than domestic rates aided by the low import duties and hence a price cut is imminent.

  • Ranbaxy expects CY06 to be a relatively stronger year. It is looking to rationalise costs and expects to have a robust product flow going forward. It plans to launch around 15 products each in CY06 and CY07. The management remains steadfast on maintaining its target of US$ 2 bn in revenues by CY07. However, the stock was amongst the biggest losers amongst index losers this week (down about 4%). This was apparently on the back of the news that AstraZeneca Plc has filed a lawsuit against Ranbaxy over its plan to launch a generic version of AstraZeneca's patented drug, Nexium. Other pharma stocks

To conclude, with the Sensex trading at over 17.5 times its trailing 12-month earnings and 15 times one-year forward earnings, there is not much left for the investor on the table from the near-term perspective. At the current juncture, we believe that investors should introspect about the sustainability of this 'liquidity driven euphoria'. It would be a wise move now to think about what could go wrong that could lead to FIIs (as they are the pump primers of this rally) pulling out their investments from Indian equities. We have already witnessed (in October 2005) as to what can happen when FIIs decide to pull out. While our concern should not be construed as if we are bearish on the markets, since we continue to believe that Indian equities is one place to remain invested in for the next 3 to 5 years, we do believe that investors must strictly follow a bottom-up approach in investing. Happy and safe investing!

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