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Bulls gallop! - Views on News from Equitymaster
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  • Dec 3, 2005

    Bulls gallop!

    The bulls seemed to have developed the traits of a horse in this rally as they continued their run on the bourses this week also. The Sensex gained another 1% this week, bringing the total tally to 5 consecutive weeks of gains and a rise of about 16%. It is the return of the Foreign Institutional Investors (FIIs) that has made this possible, as they have been buying in loads all along. This super-recovery has probably overshadowed the pains of market participants who bore the brunt of the bear carnage in the month of October 2005 when the markets had cracked by over 11%. However, that is now a story of the past.

    Riding strong on the back of the gains of the previous four weeks, the Indian stock markets began Monday's trading on an optimistic note. Though there was selling witnessed at regular intervals throughout Monday's trading session, the bulls seemed adamant on marching ahead, especially when the psychologically important 9,000 mark was within striking distance. Despite the tug-of-war, the Sensex managed to breach the 9,000 mark in the closing hour of trade on Monday with the Sensex ending the day with a century (up 106 points). However, this was followed by considerable selling pressure in the following two trading sessions as market participants thought it prudent to take some profits off the table. This led to the Sensex cracking over 200 points in two days, but not before making new lifetime highs in opening trades on Wednesday. Even the strong 2QFY06 GDP growth number on Wednesday failed to support sentiments.

    However, the bears could not sustain their pressure for long as the bulls came back with an equally strong vigour on Thursday and most part of Friday. While buying across the board helped the Sensex to recoup (up 156 points) most of the previous couple of sessions' losses on Thursday, it managed to, once again, create a lifetime high (9,058) in the initial hour of trade on Friday. Thus, at this juncture, the Sensex had gained over 18% from its lows in late October 2005. The continued strong gains seemingly offered investors once again an opportunity to book profits and the Sensex lost almost all its gains to close marginally in the positive on Friday. The NSE-Nifty ended the week with 0.5% gains while the mid-cap stocks were relatively strong with the CNX mid-cap Index notching gains of 1.4% for the week.

    FIIs continued to be in the drivers seat this week even as domestic MFs opted to get into the back seat. In fact, if not for the MFs, the Sensex could have probably ended the week in the 9,000+ zone. This is because, while FIIs made net purchases to the tune of Rs 11 bn in the first four trading sessions of the week, mutual funds (MFs) sold equities worth Rs 1.6 bn (see chart above). What has seemingly helped the FIIs continue to pump money into Indian equities is the fact that while the Indian economy continues to power ahead with near 8% GDP growth with good visibility of earnings over the next couple of years, the US Fed has indicated of a slowdown of its rate hike exercise, thus keeping emerging markets like India preventing getting out of favour. It must be noted that the FII investments for 2005 to date is currently at about US$ 8.8 bn, the largest ever in a single year.

    Top gainers over the week (NSE-50)
    Company Price on
    Nov 26 (Rs)
    Price on
    Dec 2 (Rs)
    H/L (Rs)
    BSE-SENSEX 8,889 8,962 0.8% 9,058 / 6,069
    S&P CNX NIFTY 2,683 2,698 0.5% 2,731 / 1,894
    REL. ENERGY 569 621 9.2% 707 / 436
    ZEE TELE 150 163 8.6% 206 / 128
    NALCO 191 207 8.4% 217 / 139
    ACC 514 538 4.8% 545 / 286
    SUN PHARMA 657 688 4.7% 714 / 375

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

    • Zee Telefilms was amongst the biggest gainers this week in the index stocks with the stock gaining almost 9% this week. There were a couple of factors that seemingly led to the optimism towards the stocks. One was the fact that TRAI, the regulatory body for cable operators and broadcasters in the country, allowed a 4% hike in cable television charges with effect from 2006. It must be noted that Zee is a leading broadcaster in the country. Apart from this, the fact that Zee Sports has managed to secure the satellite rights of the current India-Sri Lanka test series outbidding competitors like ESPN-Star Sports and Prasar Bharti. Though the bid may not turn out to be a winning proposition for Zee considering the fact that the terrestrial rights for the telecast are with Prasar Bharti, which would affect Zee's bargaining power with advertisers, the winning of this right would put Zee on a stronger footing when bidding for future telecast rights with respect to BCCI matches. Other media stocks

    • Expectations of a hike in aluminium prices materialised this week with both the major domestic aluminium players, Hindalco (up 2%) and Nalco (up 9%), raining basic aluminium prices by an average of Rs 6,000 per tonne. This move by the majors comes despite aluminium prices having been already raised last month by about Rs 3,000 per tonne. It must be noted that aluminium prices on the London Metal Exchange (LME) have been trading at 10-year record highs on the back of a deficit of supply of the metal. Further, a decision by Chinese aluminium manufacturers to cut aluminium production by 10% has helped matters. Raising of aluminium prices would be beneficial for both the above players as it would lead to improved profitability for them.

      Top losers over the week (NSE-50)
      Company Price on
      Nov 26 (Rs)
      Price on
      Dec 2 (Rs)
      H/L (Rs)
      GLAXO 1,156 1,092 -5.5% 1,185 / 665
      HERO HONDA 861 824 -4.3% 871 / 471
      BHARTI TELE 373 358 -4.1% 377 / 176
      ORIENTAL BANK 260 249 -4.0% 382 / 230
      BAJAJ AUTO 2,064 1,983 -3.9% 2,150 / 985

    • Bharat Forge, the second largest forging company in the world, is on the lookout for suitable buying opportunities in Eastern Europe and China. While the rationale for acquisition in Europe is the fact that with a number of East European countries expected to be members of the EU in the next 2-3 years, there would be significant benefits in terms of free movement of goods and taxation aspects. This could provide a protection to the consolidated margins of the company, which have fallen significantly due to the acquisitions in the developed regions of the world, where the cost of operation is significantly high. Further, the rationale for the Chinese acquisition is the country's crucial role in the world automotive market. It must be noted that China is expected to manufacture 4 m vehicles (compared to India's 1 m), which would through up huge opportunities for auto ancillary companies. Other auto stocks

    • In line with most of the engineering stocks, L&T (up 4%) was in limelight this week. Also aiding sentiments this week for the stock was the news of the company bagging a Rs 10 bn turnkey project from energy major ONGC and a Rs 2.6 bn order for the construction of a passenger terminal building at the proposed Hyderabad International Airport. One must further note that at the end of 2QFY06, L&T's engineering and construction division had a backlog of over Rs 193 bn, which is almost 1.7 times the segment's gross sales in FY05. Further, considering the complexity involved in ONGC's project, the margins are likely to be higher, which will augur well for the company going forward. Other engineering stocks

    With this week's gains, the Sensex is currently trading at 17.5 times its trailing 12-month earnings, which is by no means attractive. In fact, we believe that it is over-valued in the short-term as much of the FY06 growth seems to be already priced in. Thus, the current valuations do not leave much margin of safety and any falter on the financial performance deliverables by India Inc. over the next couple of quarters would not go down well with the markets. We would continue to advise utmost caution at these levels. Happy and safe investing!



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