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Jingle bells...jingle bells! - Views on News from Equitymaster
 
 
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  • Dec 25, 2004

    Jingle bells...jingle bells!

    Extending their last week gains, the Indian indices cruised smoothly into higher territories on the back of continued FII inflows. With over 2% gains on the bourses this week, the Sensex is now comfortably close to the 6,500 levels (having already breached it during intra-day trades on Friday) while the Nifty also continues to trade at record levels. Ample liquidity has been the primary driver for Indian markets in recent times on the back of expectations of continued strong performance by India Inc. in the ensuing quarters.

    The indices this week moved largely in a single direction barring the small correction witnessed in Wednesday's trade. FIIs continued to pour money into Indian equities with their net inflows for 2004 now standing at US$ 8.3 bn with a week still remaining for the year to end. A major cause for this has been the favourable view adopted by international investing community towards the prospects of India going forward on the back of strong performance by corporate India over the past 12-18 months and the likeliness of it continuing for some more time. However, the acceleration of FII inflows into the Asian markets, including that of India, can be partially attributed to the weakening US dollar on the back of its high current account deficit. Thus, there are expectations of Asian currencies, including the Indian rupee, becoming stronger in the scenario of the US failing to curtail its deficit, which has caused FIIs to pump in some extra money into Asian markets in the current quarter.

    Some key gainers over the week (NSE-50)
    Company Price on Dec 17 (Rs) Price on Dec 24 (Rs) % Change 52-Week H/L (Rs)
    BSE-SENSEX 6,346 6,498 2.4% 6,508 / 4,228
    S&P CNX NIFTY 2,012 2,063 2.5% 2,066 / 1,292
    VSNL 222 243 9.3% 249 / 110
    TISCO 331 361 9.1% 348 / 155
    HERO HONDA 509 547 7.4% 597 / 320
    SAIL 57 61 7.0% 61 / 21
    RELIANCE 491 525 6.8% 650 / 382

    Now, let us consider some sector specific action on the bourses.

    There was buying witnessed in most of the sectors this week, the key amongst them being metals, banks and auto. Gains in steel and aluminium stocks can be attributed to the continued buoyancy being witnessed in the international and domestic markets with respect to steel and aluminium prices. While steel prices have failed to show any signs of cooling off, contrary to our expectations, aluminium prices have continued to surge ahead as anticipated. This led to some significant buying in stocks like Hindalco, Tisco and SAIL, which helped the metals index notch near 6% gains during the week.

    On the banking front, the optimism with respect to the consolidation chapter gathered momentum with the BSE Bankex index closing higher by about 5% for the week. This was aided by the news of the clearance of the merger by the government of Bank of India with Union bank of India, which was followed by the announcement of a stake sale by Bank of Rajasthan. As far as gains in the auto pack is concerned, sentiment towards these were seemingly bolstered by the fact that auto (both two-wheeler and four-wheeler) manufacturers intend to hike the prices of their products in the new year in order to offset the adverse impact of rising input costs of raw materials like steel and plastics on their margins. The BSE Auto index ended the week with over 4% gains.

    Some key losers over the week (NSE-50)
    Company Price on Dec 17 (Rs) Price on Dec 24 (Rs) % Change 52-Week H/L (Rs)
    HDFC 795 761 -4.3% 808 / 450
    COLGATE 186 179 -3.9% 189 / 102
    HLL 150 144 -3.7% 245 / 101
    SATYAM 423 409 -3.2% 442 / 230
    INDIAN HOTELS 566 550 -2.8% 575 / 321

    However, the software sector continued to remain out of favour as is evident from the fall in the BSE IT index, which lost 1% during the week. While part of the correction amongst software sector stocks could be attributed to the fact that they had had a significant run in the recent past, which could be encouraging investors to book profits at higher levels, fear of rising rupee, increasing wage bills and higher marketing costs putting pressure on margins of Indian software companies could also be playing its part in weakening the outlook for the sector in the near-term.

    Going forward, with the Indian indices now trading in the region of about 14x-15x their trailing 12-month earnings, they are no longer amongst the most attractive of destinations in terms of valuations. While the valuations going forward (with a 2-3 years perspective) remain attractive, at the current juncture the indices have started to look somewhat expensive. Further, considering that FIIs have been the primary drivers of this rally, any adverse development on the global or Indian front could see this money flow out real fast (akin to May 17, 2004) leaving Indian investors in a lurch, as no Indian financial institution would have the appetite to buy all that is on offer by the FIIs. Also, rising US interest rates might be a big reason for the 'much-touted' FII money to reverse direction and move towards the safer US treasury bills and bonds.

    While we are not trying to take the role of a 'doomsayer', what we are concerned about is the fact that markets are seemingly not taking into consideration the various risks that cloud the horizon. Thus, at this moment, it is pertinent to look at both the upside and the downside with a fundamental view i.e. earnings growth and relative valuations. In the same breath, we would like to state that we remain positive on India Inc.'s long-term prospects and believe that a selective and staggered investment approach is apt for investing into equities at the current juncture. Happy investing!

     

     

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