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The boon in disguise! - Views on News from Equitymaster
 
 
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  • Dec 16, 2006

    The boon in disguise!

    The indices were back in the reckoning during the latter half of the week and as a consequence, the damage that initially appeared substantial, turned rather muted towards the end. For the week, while the BSE-Sensex shed a little more than 1%, at 2%, the losses in NSE-Nifty were a little more pronounced.

    It is widely acknowledged that a correction after a strong rally is always a healthy sign as it helps curb excessive optimism. Hence, when the Indian stockmarket indices touched all time highs recently after a rather prolonged bull rally, thoughts of a correction had started gathering momentum. The RBI announcement of a two-stage hike in CRR only added fuel to the fire and although the central bank had intended to avoid a knee-jerk reaction by the Indian bourses by opting to announce the decision on a weekend, it seemed to have failed to have its desired effect as the markets tanked heavily on the first two days of the week, losing 400 points each. Investors who were waiting on the sideline all this while, pounced on the opportunity and the heavy buying that ensued over the next three days helped the indices erase around 75% of the losses it witnessed over the first two days of the week.

    Index As on December 8 As on December 15 % Change
    BSE IT 5,130 5,182 1.0%
    BSE HEALTHCARE 3,725 3,702 -0.6%
    BSE SMLCAP 6,730 6,668 -0.9%
    BSE MIDCAP 5,746 5,661 -1.5%
    BSE OIL AND GAS 6,095 5,974 -2.0%
    BSE AUTO 5,393 5,262 -2.4%
    BSE METAL 9,041 8,803 -2.6%
    BSE BANKEX 7,214 6,995 -3.0%
    BSE FMCG 2,021 1,952 -3.4%
    BSE PSU 6,215 5,968 -4.0%

    As expected, all the major indices were swathed in a sea of red during the week. The sole exception was the IT index that edged higher by a respectable 1%. Relatively higher insulation from the Indian economy helped the index avoid the coat of red. Sector bellwethers, Infy and Satyam were among the few gainers on the Nifty during the week and also contributed to most of the gains in the index as together they account for nearly 70% of the index value. The BSE PSU index was the worst hit as it edged lower by 4% during the week. Another heavy loser was the Bankex as it lost 3% following the drubbing received by the sector stocks on account of the CRR hike.

    Having looked at the movement in key indices in the last week, let us consider some sector/stock specific developments:

    Banking stocks across-the-board faced selling pressure with three banks featuring among the top 5 losers on the NSE Nifty during the week. The decline was largely a result of the RBI's decision to hike the cash reserve ratio (CRR) by 50 basis points to 5.5% in two tranches of 25 basis points each, seemingly to contain inflation expectations. As per the Reserve Bank of India (RBI), as a result of the hike in CRR, an amount of about Rs 135 bn of banks' resources would be absorbed. The same is expected to have a cascading effect on banks' lending rates, especially, that on the sub-PLR portfolio. It may also be noted that the RBI had in a policy measure earlier this year had withdrawn the interest of 3.5% payable on the CRR. The further sucking out of funds in the non-remunerative CRR basket would also mean margin pressures for the banking entities. Major PSU banks such as SBI, PNB and OBC lost in the region of 6% to 8% during the week.

    COMPANY Price on Dec 8 (Rs) Price on Dec 15 (Rs) % CHANGE 52-WEEK H/L (Rs)
    BSE Sensex 13,799 13,615 -1.3% 14,035 / 8,799
    S&P CNX NIFTY 3,962 3,889 -1.9% 4,047 / 2,596
    MOSER-BAER INDIA 247 269 8.8% 292 / 162
    HMT LTD 75 81 8.3% 101 / 38
    DENA BANK 37 40 8.0% 42 / 20
    GUJ IND POW 58 62 6.8% 83 / 45
    BHARAT ELEC 1,209 1,283 6.1% 1472 / 815

    Engineering major L&T was among the few gainers on Nifty. The company, during the week bagged the Rs 54 bn Delhi airport modernization contract. The order involves design and construction of a passenger terminal and a 4.43 km runway, which is expected to be one of Asia's longest. The new passenger terminal will be named as Terminal 3 and will be built adjacent to the existing international terminal. It is expected to have the capacity to handle 37 m passengers a year, which is more than double the existing volume of traffic. It must be noted that at the end of September 2006, L&T's Engineering and Construction (E&C) division's order backlog stood at 293 bn, almost 2.5 times the segment's full year sales in FY06. This move is part of the company's strategy to focus on projects in sectors such as airports, ports, power and upstream oil and gas. The company's peers, ABB and Suzlon Energy, lost 5% and 3% during the week.

    COMPANY Price on Dec 8 (Rs) Price on Dec 15 (Rs) % CHANGE 52-WEEK H/L (Rs)
    CROMPTON GR 266 208 -21.5% 284 / 142
    INDUSIND BANK 50 43 -12.9% 64 / 27
    IDBI 85 76 -10.0% 110 / 49
    ROLTA INDIA 264 241 -8.6% 285 / 124
    PNB 554 507 -8.4% 585 / 300

    In another headline grabbing news during the week, Tata Motors and Fiat are envisaging a joint venture with an investment of over Rs 40 bn to make cars and engines and possibly expand it to produce trucks as well. The annual capacity will be more than 100,000 cars and 200,000 engines and transmissions and production will start from the beginning of 2008. Tata Motors will distribute the cars through the Tata-Fiat dealer network, which is also set to expand to 100 outlets from the current 42. Fiat had, earlier this fiscal, announced that it would manufacture Tata Motors' new 1-tonne pick-up truck at its plant in Argentina for Latin American and overseas markets from 2HFY08. Tata Motors (Telco) is India's largest commercial vehicle (M/HCVs and LCVs) manufacturer, with a market share of 62% in FY06 (59% in FY04) and second largest producer of passenger vehicles. The stock lost 1% during the week along with its peers Maruti and M&M (each down 3%).

    Going by the mood of the market during the last days of the week, the CRR hike effect seems to be behind it and is now effectively waiting for the next catalyst to once again trigger significant movement on either side. While the current correction may look big from a week's perspective, over the long term, it is most likely to form a small blip on the bourses, whose fortunes are otherwise on the ascendant. In other words, there is still a lot left on the table for long-term investors provided they stick to quality stocks at reasonable valuations.

     

     

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