Are the bulls tired? - Views on News from Equitymaster

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Are the bulls tired?

Dec 24, 2005

Extreme volatility characterised the trading sessions this week, as the bulls and the bears played tug-of-war. While the bears seemed adamant to prevent any further rise in the markets (rather pull it down if possible), the bulls stayed put everytime the bears pressed the 'sell' button. At the end of all this, however, the bears managed to score marginally over their opponents, thus bringing the 7-week rally to a halt. For the week, both the BSE-Sensex and the NSE-Niftylost marginal ground. The scenario was not any different in the mid-cap and small-cap segments of the market. It was a week filled with volatility, as the Sensex swung wildly between the 9,300 and the 9,400 levels several times during the week before breaking out of this range and heading deeper into the red on Friday. Though the start on Monday was firm, there was profit booking witnessed at regular intervals as the Sensex crawled to the psychological 9,400 mark and ending the day with 100+ point gains. However, the following day saw profit booking emerge at these levels, pulling the markets down. Though there was some buying witnessed at lower levels, it was not enough to pull the markets out of the trough. Then, once again, on Wednesday, though the markets opened strong with the Sensex making new lifetime highs, a sharp bout of selling pressure saw the Sensex lose almost 150 points from its intra-day peak. Again, buying at these lower levels helped the markets to recoup some lost ground, but the damage had already been done.

Though follow-up buying was witnessed in Thursday's early trades, investors continued to lack conviction, as, at the slightest whiff of profit booking, investors would start to dump stocks, leading to sharp corrections. However, Friday was a different day in the sense that the markets broke away from this volatility and maintained a consistent bearish trend after making new lifetime highs in opening trades. Profit booking witnessed across various index heavyweights like NTPC (down 4%), HDFC (down 7%), Tata Steel (down 3%), Reliance Energy (down 3%), Tata Power (down 3%) and Zee (down 4%) did the damage. Further, most of these stocks, barring Tata Steel (up marginally) ended the week in the red, down 2% to 5%.

So, who were the bulls and the bears this week around? Well, it was the 'firangis' (FIIs) once again who played the role of the former, while our very own MFs were the party poppers. This is evident from the fact that Foreign Institutional Investors (FIIs) bought equities worth over Rs 21 bn in the first four trading sessions of the week, which includes the Rs 6.5 bn worth of equity bought by them from Warburg Pincus, who diluted its stake in cement major, Gujarat Ambuja. As far as the mutual funds (MFs) were concerned, they were net sellers to the tune of Rs 3 bn, making it the fourth consecutive week of selling by them.

Top gainers over the week (NSE-50)
COMPANY Price on Dec 16 (Rs) Price on Dec 23 (Rs) % CHANGE 52-WEEK H/L (Rs)
BSE-SENSEX 9,284 9,257 -0.3% 9,443 / 6,069
S&P CNX NIFTY 2,810 2,805 -0.2% 2,857 / 1,894
DABUR 189 201 6.1% 202 / 81
WIPRO 442 465 5.4% 470 / 272
IPCL 220 229 3.7% 251 / 156
ONGC 1,150 1,191 3.6% 1,205 / 762
DR. REDDY 935 966 3.3% 1,000 / 605

Now let us consider some stock specific developments this week:

  • Dabur was another key gainer amongst the index stocks, up 6%. The optimism towards the stock was seemingly on the back of the news that the company is in talks with FMCG major, HLL, for acquiring the latter's Nihar coconut hair oil brand. Nihar is a Rs 1 bn brand and with this acquisition, Dabur will be able to compete with Marico's Parachute, which commands a market share of around 50% in the Rs 8 bn branded coconut hair oil market. Dabur currently has Vatika, Anmol and Amla in its portfolio, which contributes Rs 4 bn to the company's topline. Other FMCG stocks

  • Wipro was in the limelight this week (up over 5%) on the back of a couple of acquisitions it made through its global IT arm, Wipro Technologies. First, it acquired NewLogic, which is a chip design firm in Austria, with estimated revenues of US$ 17 m in 2005. The acquisition of NewLogic will give Wipro enhanced capabilities in the semiconductor space. The other acquisition made by the company was that of New Jersey-based mPower, which is a niche company, focused on the payments space of the financial services industry. The company has annual revenues of US$ 18 m. This acquisition combines the domain strength of mPower in payments with Wipro's expertise in financial services and its wide array of service offerings and global reach. This is in line with Wipro's growth strategy to invest in areas where it does not have a major presence and in which it can establish a leadership position. Other software stocks

  • The news of the plans to launch a new chain of retail stores under the 'Stupid Cupid' brand by Archies (up 25%), the market leader in the greeting cards space, which also sells other social expression products like gifts and posters, led to investors scurrying for the stock. These stores will stock fashion accessories and premium gifts, thus, expanding the company's offerings. The company is planning to open 5 such stores by the end of this fiscal and 10 more in the next financial year. Currently, the company owns 55 stores and has booked retail space in upcoming malls across the country for 133 more stores, all of which are expected to come up over the next two years. Archies' greatest strength is its retail reach, as the company has around 430 retail outlets spread across over 100 cities in 6 countries.

  • 3i Infotech (up 13%), a mid-sized software company focused mainly on the banking, financial services and insurance (BFSI) vertical, signed a US$ 2.6 m deal this week with a Malaysian bank, Hong Leong Bank, to provide Triton loan origination software application. This bank is among the top five banks in Malaysia having 180 branches. Triton will cater to four lines of business, which include mortgage, card, margin money financing for stockbrokers and lending to small and medium enterprises and is only for scouting for customers i.e. for loan origination. This is part of the company's strategy to look at export markets to fuel growth as it provides better price realisation. It must be noted that the company had estimated its revenues to grow by 25%-30% for the current year and net profit to be 13%-15% of revenues. Other software stocks

    Top losers over the week (NSE-50)
    COMPANY Price on Dec 16 (Rs) Price on Dec 23 (Rs) % CHANGE 52-WEEK H/L (Rs)
    RANBAXY 391 360 -7.9% 634 / 339
    REL. ENERGY 633 600 -5.3% 707 / 473
    MARUTI 658 627 -4.8% 687 / 389
    SUN PHARMA 704 671 -4.6% 725 / 375
    JET AIRWAYS 1,209 1,155 -4.5% 1,379 / 973

  • Ranbaxy was the biggest loser amongst index stocks this week, losing by as much as 8%. This was the fallout of Ranbaxy receiving an unfavourable ruling when a US court found both the patents covering Pfizer Inc's blockbuster cholesterol reducing drug 'Lipitor' (atorvastatin) to be valid. This means that Ranbaxy will not be able to launch the generic version of the drug before 2011. The market for Lipitor globally is estimated at US $10 bn, with the US market accounting for over 70% share. Ranbaxy intends to appeal on the verdict, which is likely to take around one year. This decision follows the unfavourable ruling, which Ranbaxy received in the UK court decision in October 2005. Other pharma stocks

To conclude, considering this week's behaviour, the one question that comes to mind is, are the bulls tired or is it just a temporary phase as they pause for breath before resuming their journey? Well, while we do not make any directional calls for the markets for the near-term, even if we were doing so, at the current juncture, we would have refrained from making any directional call. In fact, anybody who claims he can, is probably betting big on luck to support his call, as nobody knows what FIIs are going to do in the next week or month. However, what we can definitely say is that though investing at the current levels is froth with risks, as we find the markets to be fairly valued for the next 1 year at least, in the long-term, there are no second thoughts on the direction of the Indian stockmarkets. Though intense volatility could mark the market movements over the next few quarters, the long-term India story remains intact.

Thus, at the current juncture, the one good way to invest would be to invest in small quantities at pre-determined regular intervals in fundamentally sound stocks with some value still left in them. We know that investment ideas at the current levels are difficult to come by, but a little bit of hard work and extra research could help you recognise a few of them. This type of investing pattern would not only help an investor to be a part of the rally (if it continues), it would also protect him/her from over-exposing to equities at the current historic high levels and would thus protect him/her from getting severely hurt in the case of a correction. Moreover, even if a correction comes by, the investor would not have to worry on account of his fundamentally safe investments. Happy and safe investing!


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