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Markets get an economic leg-up!

Dec 2, 2006

Markets did a six-on-six in the week gone by, as the benchmark indices yet again edged higher and closed in the positive for the sixth week in a row. Both the BSE-Sensex and the NSE-Nifty, added another 1% to their total tally.During the week, indices inched higher for four days out of five. The only blot occurred on Tuesday, when led by declines in key heavyweights, close to 200 points were shaved off from Sensex. While the gains on Wednesday were marginal, strong buying during the rest of the three days ensured that the indices close higher for the week. Particularly noteworthy was the strong upward movement on Friday, where riding on the back of strong GDP numbers and robust monthly auto numbers, the indices rose sharply and ended the day and the week with another all time high. Nifty, the most widely followed benchmark after Sensex, was witness to yet another landmark as it touched the elusive 4,000 mark in intra-day trading on Friday but closed a shade below the landmark.

As far as the institutional activity on the bourses was concerned, FIIs were net buyers this week to the tune of nearly Rs 23 bn. Domestic mutual funds, on the other hand, turned out to be net sellers to the tune of Rs 6 bn.

(Rs m)FIIsMFsTotal
24-Nov-0611,787 (3,395)8,392
27-Nov-06 9,946 (261)9,685
28-Nov-06 4,056 (2,689)1,367
29-Nov-06(3,353)1,165 (2,188)
30-Nov-06 630 (884) (254)
Total23,066 (6,064)17,002

As far as sectoral indices are concerned, BSE SMALLCAP, the index that was at number three the previous week, jumped to the top spot with gains of 3%. As mentioned earlier, with most of the large caps looking adequately valued, the interest is shifting towards small caps and mid caps, as they have not participated in the recent rally as strongly as the large caps. Auto and FMCG indices were also not far behind as gains in them were a tad lower at 2.5%. While gains in ITC propelled the FMCG index, optimism towards Maruti, Bajaj Auto and Hero Honda aided the rise in auto index. IT index, gainer during the previous week, suffered a decline this time around as the index edged lower by 0.3%. While the fall could be termed as a normal bout of profit booking, any further appreciation in rupee against dollar is likely to hurt the bottomline of IT companies owing to the dollar based revenues of the sector companies.

IndexAs on November 24As on December 1% Change
BSE SMLCAP 6,523 6,719 3.0%
BSE Auto 5,339 5,473 2.5%
BSE FMCG 2,001 2,051 2.5%
BSE MIDCAP 5,655 5,775 2.1%
BSE BANKEX 7,150 7,290 2.0%
BSE HEALTHCARE 3,744 3,770 0.7%
BSE IT 5,157 5,142 -0.3%
BSE PSU 6,289 6,251 -0.6%
BSE OIL AND GAS 6,178 6,130 -0.8%
BSE METAL 9,015 8,913 -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:

Earlier in the week, Tata Power announced decent results for the second quarter and first half ended September 2006. For 2QFY07, while revenues have grown by 14% YoY, the strong bottomline growth has been a result of tax write-backs. Profit before tax has grown by 26% YoY during the quarter. However, on the back of higher fuel and staff costs, operating margins have shrunk by 200 basis points (2%). The 14% YoY growth in Tata Power's topline during 2QFY07 has been due to the company selling more volumes and earning higher rate per unit sold from customers. While volume sales grew by 6% YoY, per unit realisations were up 12% YoY. As a matter of fact, the company generated 3,522 m units (MUs) during 2QFY07, 3% YoY higher than the generation in 2QFY06. The stock gained 4% during the week while its peer, Reliance Energy, ended marginally lower.

Top gainers during the week (BSE A)
CompanyPrice on
Price on
Dec 1 (Rs)
%
Change
52-Week
H/L (Rs)
BSE Sensex13,703 13,845 1.0% 13,858/8,770
S&P CNX NIFTY 3,951 3,998 1.2% 4,001/2,596
NIIT 389 483 24.3%503/247
DENA BANK33 38 15.8%42/20
IPCA LABS 474 525 10.9%534/235
PIDILITE INDUSTRIES 116 129 10.6%144/74
ASAHI INDIA 120 132 10.0%136/70

As reported by the Central Statistical Organisation (CSO), India's GDP growth during the quarter ended September 2006 was around 9.2%, largely contributed by the services and manufacturing sectors. This was higher then the 8.9% YoY growth recorded during the April to June 2006 quarter, and speaks volumes of the strong growth momentum witnessed by India Inc. on the back of high investments and robust demand. While industry and services sectors clocked growth rates of 11.9% YoY and 10.9% YoY during the said quarter, the agriculture growth remained low at 1.7%. While these reports would have taken the benchmark indices at stronger levels, the momentum was somewhat reigned by the Finance Minister's concerns on the heating up of the economy (growth leading to higher inflation).

Top losers during the week (BSE A)
CompanyPrice on
Nov 24 (Rs)
Price on
Dec 1 (Rs)
%
Change
52-Week
H/L (Rs)
IOC504447-11.3%622/310
BONGAIGAON R5448-11.0%79/40
IBP515461-10.5%629/311
BPCL375 342 -9.0%503/291
HPCL316288-8.9%361/206

Most of the auto companies announced their sales numbers for the month of November on Friday. Auto major, Maruti reported an increase of 16% YoY in the cars sold in November 2006 as compared to last year. The domestic sales were up 20% YoY. The company's domestic volume in A2 segment grew 32.3% and in the C segment it went up 36.2% during the month compared to sales in November 2005. On the other hand, its A1 (flagship brand) and MUV segment sales as well as exports dropped over the same period. With rising income levels, auto sales are expected to witness continued growth momentum going forward. The stock ended higher by 4% as compared to previous week. Bajaj Auto, India's second-biggest motorcycle maker, declared its November sales numbers. Sales in November rose 33% YoY to 243,713 units. Sales of motorcycles rose 36% YoY to 214,321 units, while those of all two-wheelers grew 29% YoY to 214,329 units. Sales of three-wheelers were up 71% YoY to 29,384 units, while exports rose 56% YoY. Hero Honda, India’s largest two-wheeler company also recorded a strong 11% YoY growth in volumes for the month of November. Buoyant economic growth and high disposable income coupled with lower interest rate scenario has led to stellar volumes growth for the auto companies. Trend is expected to continue in the future. For the week, both Hero Honda and Bajaj Auto gained 4% each.

To sum up, while the indices did show signs of cooling down in the middle of the week, strong GDP numbers and continued momentum in auto sales, injected further life into the rally. Although there is little doubt in our mind with regards to the overall macroeconomic scenario for the long term, as always, we would like to advise investors to be utterly selective in their investment decisions. Selecting fundamentally strong companies with competent management and above all a reasonable level of valuation should form the guiding pillars of his investment decisions.


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