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The party continues...

Dec 17, 2005

The Indian stock markets continued their gravity defying activity this week also with the benchmark indices notching gains of about 2% each, thus taking the total tally to over 19% rise in the past 7 weeks. Relentless FII buying helped markets sustain the momentum, which was characterised by bouts of profit booking at every rise. However, the buying this week was restricted to large-caps only as the BSE Mid Cap Index (up 0.4%) and the BSE Small Cap Index (down 0.2%) ended the week almost unchanged.Riding strong on the back of 6 consecutive weeks of gains, the bulls provided a strong start to the Indian stockmarkets this week on Monday. This continued into the following day's trade also as the bulls were in total control. In the process, the indices continued to break previous records and achieve new lifetime highs. However, selling pressure at every rise marked the near 200-points gain in the first two trading sessions of the week. Nonetheless, the adamancy of the bulls helped them tide over this and continue to march ahead.

Early trades on Wednesday saw the BSE-Sensex breach the 9,300 mark for the first time in history. However, soon thereafter, a strong bout of profit booking saw the markets nose-dive into the red. Repeated attempts by the bulls to bring the markets out of the trough proved futile. This process of profit booking continued right into Thursday's trade as investors opted to convert some of their investments into cash. However, at the same time, Thursday's trade saw buying emerge at lower levels, which continued into Friday's trade as well after some initial apprehensions. What seemingly helped markets was the advance tax numbers of India Inc.

Though caution may have crept in, in the latter half of the trading session, Foreign Institutional Investors (FIIs) continued their buying spree, as they were net buyers to the tune of Rs 24 bn in the first four trading sessions of the week. It must be noted that this includes the allotment of the ICICI Bank issue to FIIs. Thus, with this week's net purchase, net FII investment in Indian equities in 2005 to date has reached to US$ 9.5 bn, which is a record in itself. However, while the indices kept scaling newer highs, domestic MFs were on the backseat opting to book profits at every rise. Thus, the cumulative net sales by mutual funds (MFs) in the first 4 trading sessions of the week totaled to about Rs 7 bn. It must be noted that it was the third consecutive week when domestic MFs have been net sellers (see chart above).

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

  • ABG Shipyard India's largest private sector shipbuilding yard, made its debut on the bourses this week. The stock made a high of Rs 298 on the BSE, a premium of 61% to its allotment price of Rs 185 per share. The company's principal operations consist of the construction of marine ships, which contributes 79% of its revenues. ABG Shipyard derives a small amount of revenue from ship repairs (5%) and construction of windmill towers (6%). it manufactures marine ships, including bulk carriers, deck barges, interceptor boats, tugs and offshore vessels. It has built 88 ships in the past 14 years for domestic and international buyers. It finally ended the week 47% higher over its allotment price.

    Top gainers over the week (NSE-50)
    COMPANY Price on Dec 09 (Rs)Price on Dec 16 (Rs)% CHANGE52-WEEK H/L (Rs)
    BSE-SENSEX 9,067 9,284 2.4% 9,309 / 6,069
    S&P CNX NIFTY 2,756 2,810 1.9% 2,826 / 1,894
    HINDALCO 127 141 11.0% 164 / 107
    HDFC 1,111 1,232 10.9% 1,258 / 677
    MTNL 133 145 9.2% 170 / 108
    SAIL 51 56 8.9% 70 / 47
    TATA MOTORS 576 619 7.5% 636 / 400

  • Aluminium stocks witnessed considerable buying this week with Hindalco (up 11%) and Nalco (up 7%) registering significant gains. The continued optimism towards both these stocks is owing to the fact that domestic aluminium prices, in line with the international trend on the back of deficit in supply of the metal, have been treading upwards. This would help improve the profitability of both these players. Further, it must be noted that demand in the domestic markets has been robust in the first 5 months of the current fiscal with aluminium consumption having increased by 15% YoY on the back of rise in demand from sectors like construction, automobiles and power.

  • Satyam Computer Services (up 7%), India's fourth-largest software company, has entered into a strategic partnership with the Chinese insurance software solutions company, eBaoTech, and plans to jointly promote insurance package software solutions. This partnership will enable Satyam to tap the Asia-Pacific and European regions for business. The company expects significant growth in this vertical. It should be noted that Satyam currently has the largest insurance customer engagement among all the Indian IT vendors. The company is a leader in the package implementation space and going forward, this business is expected to drive growth. Other software stocks

    Top losers over the week (NSE-50)
    COMPANY Price on Dec 09 (Rs)Price on Dec 16 (Rs)% CHANGE52-WEEK H/L (Rs)
    REL. ENERGY 656 633 -3.5% 707 / 452
    GLAXO 1,128 1,099 -2.6% 1,185 / 665
    GUJ. AMBUJA 82 80 -2.6% 85 / 49
    JET AIRWAYS 1,240 1,209 -2.5% 1,379 / 973
    RELIANCE 863 849 -1.6% 875 / 472

  • Tata Steel (up 4%), India's largest private sector steel company, has acquired Thailand's largest steel maker, Millennium Steel, for US$ 400 m. Currently, Millennium Steel has a capacity of 1.7 MTPA and makes construction-grade steel products. It must be noted that this acquisition is in-line with the company's strategy of raising its capacity from the current 5 MTPA to 15 MTPA by 2010. Further, it must be recollected here that Tata Steel had bought Singapore-based NatSteel's steel operations in 2004 (2 MTPA). Both these acquisitions will help the company strengthen its foothold in South East nations, which has been witnessing strong construction demand. Other steel stocks

While retail investors who have missed the bus are yet in a fix as to what levels should one enter at, as at every rise, investor's expect a correction and this has just not happened. This is despite adverse events, such as crude prices raising its head once again, which appear to have been completely discounted by the markets on the back of unprecedented liquidity flowing into the Indian markets. This liquidity flow has, thus, capped the downside and the expected correction has not materialised. In fact, this week's gains have pushed the markets into uncharted territory, again. This is despite the fact that valuations of most stocks are already way ahead of their fundamentals.

To conclude, in our view, we caution investors that this extended rally is largely a factor of the immense liquidity prevailing in the markets. Thus, investors should remain all the more cautious and search for stocks that still hold value. We would advise investors not to lose patience, as there is no dearth of opportunities in equity markets. Happy and safe investing!

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