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Where do you go?

Dec 18, 2004

The week gone by saw the Indian stock markets ‘zoom’ across their all-time high levels as the Sensex crossed the 6,400 barrier, only to decline sharply on the final day of trading. After the weakness that was witnessed during the previous week, this week marked a return to ‘euphoric activity’ as both the benchmark indices, the Sensex and the Nifty, moved towards their all-time high levels. However, after gaining by 3.0% during the first four days, profit booking led the markets to fall by 1.2% on Friday. While there was buying witnessed across select sectors like energy and banking, others like software and FMCG witnessed a sedate journey throughout the week. After a dull close to the week ended December 10, the markets opened strongly on Monday and continued to build up gains as the week progressed. Wednesday saw the highest gains of the week as the Sensex crossed the critical 6,400 barrier. However, after maintaining the upward momentum on Thursday, Friday saw profit booking across a range of sectors.

Key gainers over the week (NSE-50)
CompanyPrice on
Dec 10 (Rs)
Price on
Dec 17 (Rs)
%
Change
52-Week
H/L (Rs)
BSE-SENSEX 6,234 6,346 1.8% 6,437 / 4,228
S&P CNX NIFTY 1,969 2,012 2.2% 2,039 / 1,292
ZEE TELE 158 174 9.8%189 / 100
SUN PHARMA 495 534 8.0% 555 / 278
ABB 884 953 7.8% 975 / 491
SAIL 54 58 7.1% 59 / 21
GRASIM 1,192 1,270 6.5% 1,317 / 840

Now considering some stock specific action on the bourses, media major Zee Tele led the gainers’ pack this week. This seemed a result of the recent announcements with respect to hike in cable charges, which is expected to benefit the company on a consolidated basis. The incremental revenues from the hike in prices will directly filter into the bottomline, as cost of the cable remains the same. Deliberation with regard to the existing DTH policy (direct to home) is also an opportunity for the company. Gains in the pharma major, Sun Pharma, were on account of reports that the company is planning acquisition of a small company in the US. The recently issued US$ 350 m FCCB issue is likely to be used to fund the same.

Coming on to the losers’ list, Reliance ‘maintained’ its lead this week as well and lost over 3.7% over its last week’s closing levels. While much has already been said about the implications of the current imbroglio created by the owners of the Group, we would like to mention here that the Group, as a whole, benefits from synergies and that the outcome of the current situation will have a lingering effect on the way things pan out of the group companies in the future. Losses in the banking behemoth, SBI, seemed a result of profit booking after the stock had run up rapidly on account of aggressive buying by the FIIs as foreign investment in the company had declined to 18%, below the RBI limit of 20%.

Key losers over the week (NSE-50)
CompanyPrice on
Dec 10 (Rs)
Price on
Dec 17 (Rs)
%
Change
52-Week
H/L (Rs)
RELIANCE 499 481 -3.7% 650 / 382
DABUR 86 84 -2.0% 98 / 60
OBC 324 317 -2.0% 367 / 149
SBI 595 583 -2.0% 690 / 390
SHIPPING CORPN. 179 177 -1.3% 203 / 61

Coming back to the present state of the Indian markets, the very fact that they have breached their all-time highs requires investors to practice utmost caution with respect to their equity investment decisions. Further, with interest rates on the rise, stocks, especially from industries that are capital intensive and have a high debt to equity ratio should be avoided. While we are not trying to take the role of a 'doomsayer', we are concerned about is the fact that markets are seemingly not taking into consideration the various risks that cloud the horizon. For instance, one of the biggest factors that are helping Indian markets currently is the incessant flow of FII money.

At the current levels, the Nifty is trading at a price to earnings of 15 times FY04 EPS and around 13 times FY06 EPS (assuming an average earning growth of 15% for Nifty companies in the next one year). These are high levels, at least from the medium term perspective. However, there are still some good stocks that are attractive from the long-term (2 to 3 years) perspective. Rather than going all out in the markets believing that all kinds (!) of stocks will benefit from the upward momentum, investors need to follow a selective and a staggered approach to investing. Remember, risks for the short term are very high at these levels!

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