FIIs up the ante - Views on News from Equitymaster

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FIIs up the ante

Nov 27, 2004

After a rather flat close last week, the bull run on the Indian bourses resumed with the indices ending the current holiday shortened week with gains of over 1%. This is despite the recent Reliance imbroglio that saw immense selling pressure in Reliance group stocks, which in turn put pressure on the indices, capping the indices upside. With the gains this week, the Indian bourses have had a consistent run in the recent past gaining about 7% in the last 5 weeks. Bears dominated the start of trade this week as the indices opened on a rather weak footing on the back of last Friday’s news about the differences existent between the Ambani brothers with respect to ownership issues. This had a significant bearing not only on Reliance group stocks, which ended the week with significant losses, but the impact was also felt on the indices. This is owing to the fact that Reliance (5%), Reliance Energy (12%) and IPCL (5%) are part of the benchmark indices and constitute over 10% of the total weightage of the same. Reliance Capital also lost over 1% this week.

Reliance group stocks: Ownership concerns
Company Price on
Nov 18 (Rs)
Price on
Nov 25 (Rs)
%
Change
BSE-SENSEX 6,025 6,035 0.2%
RELIANCE ENERGY 628 549 -12.6%
RELIANCE 546 504 -7.7%
IPCL 189 175 -7.1%
RELIANCE CAPITAL 139 136 -1.9%

However, as trading progressed on Monday, markets recovered smartly towards the end of the day on the back of recovery in share prices of the Reliance Group stocks helped by some clarification offered by chairman, Mr. Mukesh Ambani. However, this was not enough to soothe the nervous investors who continued to pare exposure to the group stocks (see table above). The situation only worsened for Reliance group stocks as one of the directors of Reliance Industries opted to resign from the board on Wednesday. While this issue was seemingly resolved soon, the resignation of 6 directors from the Reliance Energy board the following day sent shivers down the investors’ spine and they went on a selling spree pushing the stocks to much lower levels in Thursday’s trade.

However, the continuous inflow of foreign money into Indian equities right throughout the week, seemingly led by the dollar weakness forcing foreign investors to look at other options, saved the grace for the Indian markets. It must be noted that domestic funds have been net sellers of Indian equities over the last few months seemingly on the back of redemptions on account of a slew of IPOs. Nonetheless, the FII money has provided ample support to the current leg of the rally. This strong inflow, which was invested in other index stocks, helped mitigate the adverse onslaught from the Reliance group stocks.

Some key gainers over the week (NSE-50)
Company Price on
Nov 19 (Rs)
Price on
Nov 25 (Rs)
%
Change
52-Week
H/L (Rs)
BSE-SENSEX 5,962 6,035 1.2% 6,250 / 4,228
S&P CNX NIFTY 1,872 1,901 1.5% 2,015 / 1,292
ITC 1,143 1,275 11.6% 1,284 / 812
ABB 887 940 6.0% 98 / 60
DABUR 83 89 7.6% 544 / 320
HDFC 715 768 7.3% 960 / 491
HERO HONDA 441 473 7.3% 775 / 450
Note: Click on the link above to read our view on the company/sector

Considering the gainers and losers list this week, ITC ruled this week with gains of near 12%. However, it must be noted that while there has been no specific announcement made by the company, as yet, we are enthused by ITC's performance and believe that the company's non-tobacco initiatives are on track. Further, the gains in Dabur (8%) were seemingly a result of the news that the company, which currently has an annual turnover of Rs 13 bn, is aiming to achieve the Rs 20 bn mark in revenues in the next two years. Hero Honda too notched gains of over 7% on the back of expectations of robust November month motorcycle sales owing to the festive season. As far as the losers’ list is concerned, Reliance group stocks led the charts for obvious reasons.

Some key losers over the week (NSE-50)
Company Price on
Nov 19 (Rs)
Price on
Nov 25 (Rs)
%
Change
52-Week
H/L (Rs)
RELIANCE ENERGY 621 549 -11.5% 818 / 426
IPCL 184 175 -4.9% 240 / 106
RELIANCE 527 504 -4.5% 650 / 382
BPCL 410 395 -3.6% 533 / 230
HPCL 344 336 -2.4% 542 / 262
Note: Click on the link above to read our view on the company/sector

Though the markets seemed to have shrugged off concerns relating to strong crude and commodity prices coupled with the possible impact of higher interest rates, we continue to believe that much of the growth in the near-term has already been factored into the current valuations. Thus, it is time to take a re-look at stock specific fundamentals and valuations, especially of those stocks that have appreciated significantly over the last few months and reaffirm whether the current valuations justify a company’s growth prospects. To conclude, while we continue to vouch for investment into equities, investors need to take a long-term approach in order to garner sufficient returns from this. Happy investing!

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