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Bears do a hat-trick! - Views on News from Equitymaster
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  • Dec 23, 2006

    Bears do a hat-trick!

    Amidst heightened volatility, markets continued to inch lower during the week, ultimately resulting in both the indices losing 1% each for the week ended December 22, 2006.

    Although the BSE-Sensex edged higher for three days out of five, losses on the other two days combined were so high that the net effect was a decline of one percentage point on a point-to-point basis. Particularly noteworthy was the bloodbath on Tuesday, when stunned by the Thai central bank's decision to penalize short term equity flows, FIIs pulled out of the Indian markets and the MFs opted to sit on the sidelines. While the decision was reversed immediately, by that time the damage had already been done and although the Indian indices did gain for the last two days of the week, it was never going to be enough to wipe off completely, the losses of the fateful Tuesday. As far as heavyweights on the Nifty are concerned, while 36% of those managed to close the week in the positive, the rest could not avoid a coat of red. Markets were particularly severe on BHEL and HLL as they lost 8% and 5% respectively during the week.

    As far as the institutional activity on the bourses was concerned, Foreign Institutional Investors (FIIs) were net sellers this week to the tune of nearly Rs 10 bn. Domestic mutual funds (MFs), on the other hand, turned out to be net buyers to the tune of Rs 8 bn.

    MFs (Rs m) FIIs (Rs m) Total
    15-Dec 1,310 (460) 850
    18-Dec 455 (1,827) (1,372)
    19-Dec 106 (6,734) (6,628)
    20-Dec 4,605 (3,651) 954
    21-Dec 2,363 2,648 5,011
    Total 8,838 (10,024) (1,186)

    As far as sectoral indices are concerned, BSE Oil and Gas and the auto index emerged as the top two sectors during the week. While the gains in the former could be attributed to buying interest in sector bellwether ONGC on account of its huge recent gas find, gains in auto index seemed largely a result of the surge in the market value of M&M on account of its associate company, Tech Mahindra having won a huge US$ 1 bn contract. Also, most of the sector bellwethers like Tata Motors, Maruti and Hero Honda also ended the week in positive, thus further aiding the rise in the auto index. As far as losers are concerned, decline in HLL and ITC ensured that the FMCG index remained as the worst performer during the week.

    Index As on December 15 As on December 22 % Change
    BSE OIL AND GAS 5,974 6,127 2.6%
    BSE AUTO 5,262 5,346 1.6%
    BSE HEALTHCARE 3,702 3,746 1.2%
    BSE SMLCAP 6,668 6,721 0.8%
    BSE METAL 8,803 8,838 0.4%
    BSE MIDCAP 5,661 5,649 -0.2%
    BSE PSU 5,968 5,917 -0.9%
    BSE BANKEX 6,995 6,829 -2.4%
    BSE IT 5,182 5,055 -2.4%
    BSE FMCG 1,952 1,902 -2.6%

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

    Top gainers during the week (BSE A)
    Company Price on
    Dec 5 (Rs)
    Price on
    Dec 22 (Rs)
    H/L (Rs)
    BSE Sensex 13,615 13,472 -1.0% 14,035 / 8,799
    S&P CNX NIFTY 3,889 3,871 -0.5% 4,047 / 2,596
    IGATE SOLUTIONS 257 330 28.5% 350 / 145
    J&K BANK 575 673 17.0% 678 / 306
    VISUAL SOFT 68 78 14.8% 266 / 58
    WARTSILA INDIA 292 330 12.9% 530 / 246
    NIIT 438 493 12.6% 550 / 247

    Stocks from the power sector closed in the red during the week. Major losers included Reliance Energy (down 3%) and Tata Power (1%). Tata Power has emerged as the lowest bidder for the 4,000 MW ultra mega power project at Mundra (Gujarat). The company, by quoting a tariff of Rs 2.26 per unit for the imported coal based plant, has outbid its nearest rival Reliance Energy by almost 40 paise, indicating the kind of aggressiveness in the bidding process. As for the other project in Sasan (Madhya Pradesh), the Hyderabad based Lanco Infratech has emerged as the lower bidder, having quoted a price of Rs 1.19 per unit. These bids are vindictive of the validity of competitive bidding process, as the benchmark price of the pithead power is Rs 1.50 to Rs 1.60 per unit (rate at which NTPC generates electricity from its pithead stations). These projects shall involve an investment of around Rs 160 bn to Rs 200 bn, and are likely to be funded through a debt to equity ratio of 70:30. While work on inviting bids for another ultra-mega power project in Andhra Pradesh is already going on, Jharkhand is next in line.

    Sobha Developers became the latest entrant to the exclusive club of listed Indian real estate companies as its stock debuted on the bourses during the middle of the week. The stock ended the week at a huge premium of 58% to its allotment price but not before gaining as high as 84% over allotment price and then settling down at lower levels. The real estate companies are the flavour of the season currently and hence vulnerable to extreme valuations. The quality of assets, which in the case of real estate companies are the land banks need to be carefully looked into before considering an investment into these companies.

    Top losers during the week (BSE A)
    Company Price on
    Dec 15 (Rs)
    Price on
    Dec 22 (Rs)
    H/L (Rs)
    I-FLEX SOLUTIONS 2,009 1,803 -10.2% 284 / 142
    BHEL 2,496 2,301 -7.8% 64 / 27
    HINDUSTAN ZINC 894 831 -7.0% 110 / 49
    SKF INDIA 286 267 -6.7% 285 / 124
    DENA BANK 40 37 -6.3% 585 / 300

    Tier II software stocks remained investor's favorite during the week. Some key gainers included NIIT (up 13%), Polaris (up 12%) and Mastek (up 8%). The show stealer however was Tech Mahindra as it gained a stupendous 47% during the week. The buoyancy was a result of reports that the company has won a US$ 1 bn contract from British Telecom (BT), which will be executed over a period of 5 years. This is one of the largest outsourcing contracts in the history of Indian software services industry. As part of the contract, Tech Mahindra will support BT's planned growth of managed services to business customers around the globe and continue to provide ongoing services related to its internal systems, processes and reusable platform. As a matter of fact, BT is one of the promoters of Tech Mahindra and currently holds around 32.6% stake in the company. Also, the latter already derives almost 59% of its revenues from the former.

    Taking into account the current valuation levels as well as the cues emanating from the global markets, we expect markets to remain range bound over the next couple of weeks. The onset of the results season will however decide which way the markets will move next. If the news on the macroeconomic front over the past few weeks is any indication, we are likely to see the continuation of the growth story from India Inc and the consequent positive response from the stock markets. However, if one is looking to invest, keep an eagle eye on valuations and stay away from overheated stories.



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