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What's in store?

Dec 3, 2004

The month of November has been the best so far in terms of wealth creation, with the bulls roaring in and the indices touching an all time high going into the current month. The rally was driven by the huge inflow of FII money, who brought in about US$ 1.5 bn in the month of November. The total FII inflow in the country has been in the range of US$ 7.2 bn in the current year, which is an all time high.

MonthFII inflow (US$ m)
Jan-04 699
Feb-04 530
Mar-04 1,256
Apr-04 1,752
May-04 (717)
Jun-04 115
Jul-04 198
Aug-04 625
Sep-04 519
Oct-04 714
Nov-04 1,495
Total (till Nov) 7,186

A large interest has been generated amongst foreign investors towards Indian equities, considering the size and the prospects of the Indian economy. The cyclical recovery of the industry, changing demographic profile towards young population, government's commitment towards reforms and various outsourcing opportunities has added extra flavour to the Indian curry.

Let's take a look at the top gainers amongst the Sensex stocks in the last one month.

Top gainers
PRICE ON Nov 01, 2004 (Rs)PRICE ON Dec 02, 2004 (Rs)% Change
BSE-Sensex 5,704 6,328 10.9%
NSE-Nifty 1,798 2,000 11.2%
HDFC 630 804 27.6%
SBI 469 585 24.8%
HPCL 307 370 20.6%
ITC 1,086 1,284 18.2%
Tata Motors 416 490 17.8%

The banking and financial institutions dominate the list with HDFC and SBI being the biggest gainers over the month. The key reasons for the banks gaining ground include the basic development of the economy, and the gross credit off-take from the scheduled commercial banks growing by 28% in the first seven months of this fiscal against 12% in the same period last year. The demand for capital is rising in the economy, which suggests that the investment cycle is strong and is likely to sustain for the medium term as most of the investment plans are spread over a 2-3 year period. The banks are likely to benefit in a true sense with this credit pick up as the extraordinary profits in last two years were due to gains on treasury front thanks to falling yields. Moreover, with the government showing signs of relaxing the acquisition norms, things look encouraging on the consolidation aspect. However, investors must be cautious with their investment in banking stocks, as higher credit off-take will also result in higher delinquencies, which might affect the banking stocks going forward.

The oil stocks are back in reckoning by virtue of some positive and economically prudent steps taken by the government last month, like increasing the prices of petroleum products. Also, the commitment of government to increase the prices of LPG to the fair price in the long run was welcomed by the investors. Besides HPCL, other key gainers were IOC and BPCL.

Auto, along with metal stocks, was also amongst the top gainers on the bourses with some positive news flow in that direction. While steel companies have increased the prices of various products, as demand and international prices of the products continue to soar, auto stocks gained after strong growth in car as well as CV's continued in the month of October and November. However, one must take a cautious view on the auto sector, as the impending price increases may take its toll on the demand side.

Top losers
PRICE ON Nov 01, 2004 (Rs)PRICE ON Dec 02, 2004 (Rs)% Change
BSE-Sensex 5,704 6,328 10.9%
NSE-Nifty 1,798 2,000 11.2%
Reliance energy 631 573 -9.2%

Amongst the Sensex stocks, Reliance Energy was the sole loser, which has more to do with some development on the promoter aspect of the company. However, with the company announcing plans to bid for the distribution of power in UP (Uttar Pradesh), things may look up.

What's our view?
The indices have reached a new high and, while we are certain that India Inc. will continue to perform well in the medium to long-term, it is time to take a re-look at your returns expectations, stock specific fundamentals and valuations, to make sure if the current valuations justify the various parameters on which one should buy or hold stocks. The return expectations have to be rationally driven and one should stick to the discipline. However, we would like to say that though the story in certain sectors and stocks may be well over, there are certain sectors that may be left out from a longer-term perspective. We would like to conclude by saying that one needs to tone down the return expectations from the current levels. If you are looking to invest in equity markets, do not make haste at the current juncture.

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