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Ending on a bullish note!

Dec 31, 2005

What seemed like 'the bulls are tired' last week turned out to be a mere 'pause for breath' as the bull charge continued this week. The Indian stockmarkets ended the week with over 1% gains and settled at levels, which are almost within striking distance of their lifetime highs. Thus, with the gains this week, the Indian benchmark indices have gained almost 21% in the last 9 weeks. As far as the action this week in the other market segments were concerned, it was somewhat stronger as is evident from the 1.7% gains by the BSE Mid-cap Index and the 2.2% gains by the BSE Small-cap Index. Continuing from the 100+ points fall witnessed on Friday last week, the Indian stockmarkets continued their downward spiral on Monday with another massive correction of 170 points on the Sensex. Thus, considering from the peak (lifetime high of 9,443) achieved by the Sensex on Friday, the index collapsed by almost 400 points (or about 4%) within a span of just 2 trading sessions. However, it must be noted that the correction on both these trading days was devoid of any participation from the institutional front, as while FIIs were net buyers on both these days, domestic MFs sold only a small quantity on Monday. However, Tuesday was a different ballgame altogether, with the bulls returning back with a vengeance to take the index back to the 9,300 levels.

Wednesday saw considerable volatility on the bourses as Reliance toyed with the indices. Nonetheless, despite the gains in this index heavyweight, bears had it their way. The market behaviour was not very different on Thursday either. However, it must be noted that the settlement of the December series derivatives also played its part in creating volatility in the markets. Breaking off from the intra-day volatility of the past couple of days, the bulls took control over the markets on Friday as the Sensex breached the 9,400 barrier with relative ease once again. However, it is worth noting that this journey of the Sensex from the 9,050 levels on Monday to 9,400+ was aided little by the institutional buying as can be seen in the chart above. In fact, for the first 4 trading sessions of the week, both FIIs as well as MFs bought Indian equities worth Rs 3 bn each.

Top gainers over the week (NSE-50)
COMPANY Price on Dec 23 (Rs) Price on Dec 30 (Rs) % CHANGE 52-WEEK H/L (Rs)
BSE-SENSEX 9,257 9,398 1.5% 9,443 / 6,069
S&P CNX NIFTY 2,805 2,837 1.1% 2,857 / 1,894
TATA CHEM 222 235 5.9% 236 / 141
RELIANCE 843 889 5.5% 901 / 490
L&T 1,752 1,845 5.3% 1,850 / 890
ORIENTAL BANK 258 271 5.2% 382 / 230
DABUR 201 211 5.1% 212 / 81

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

  • Reliance (up 6%) was in the limelight this week with market participants as well as stockmarket regulators focused on the issues pertaining to the Reliance de-merger. However, all the confusion and fuzziness related to the listing of the de-merged Reliance on the bourses and the implications of the consequent impact of the reduced market capitalisation of the stock on the benchmark indices were sorted out this week. It has been decided by the stockmarket regulators that a special one-hour trading session would be conducted for market participants prior to the normal market hours to arrive at the value of the de-merged entity on the day it gets listed on the bourses, which would then reflect on the indices when the normal trading hours resume. The matters related to the F&O segment were also resolved. This led to significant buying interest in the stock.

  • Tata Chemicals, a leading manufacturer of chemicals, fertilisers and food additives, was the biggest gainer amongst Nifty stocks this week (up 6%). This was seemingly on the back of the development that it has acquired a 63.5% stake in a UK-based chemicals company, Brunner Mond Group, which is one of the world's leading manufacturers and suppliers of soda ash and associated alkaline products. Soda ash is used in the glass industry and has strong demand growth, both in India and globally. The transaction is in line with Tata Chemical's strategy to explore new business opportunities. It will enable the company to establish a presence in the natural soda ash segment and give access to several new markets like Pakistan, Malaysia, Philippines and Vietnam. Other fertiliser stocks

  • Engineering and construction major, L&T, continued its strong run on the bourses (up 5%), which began almost 2 months back. During this period, the stock has gained by over 40%. Apart from the strong accretion to the company's order books, we believe that a part of this rapid rise in L&T's stock price is owing to speculation. The company has recently won a large order of Rs 4.1 bn from Gangavaram Port Ltd, which will involve EPC works and would take a period of 2 years to complete. While we do believe the long-term growth story that the Indian infrastructure and construction sector presents, we would advise investors to be cautious with respect to the rapid rise in the stocks from the sector. Other engineering stocks

  • 3i Infotech, a mid-sized software company, focused on products and services for the banking and ERP space, gained 8% this week. The stock has been in the news recently. It had acquired 3 companies, 2 of them US-based and one India-based company, which offered products in areas like business intelligence, security software and anti-money laundering. The company had also mentioned that it might raise its guidance for FY06 when the board meets in January to consider the third quarter results. This will be helped by the recent acquisitions. 3i Infotech had also said that it was considering more acquisitions, particularly in domains where it currently does not have a presence, like wealth management, mutual funds and trade finance. Other software stocks

    Top losers over the week (NSE-50)
    COMPANY Price on Dec 23 (Rs) Price on Dec 30 (Rs) % CHANGE 52-WEEK H/L (Rs)
    VSNL 411 383 -6.8% 445 / 161
    BAJAJ AUTO 2,081 2,001 -3.8% 2,165 / 985
    ABB 1,964 1,925 -2.0% 2,060 / 862
    BHARTI TELE 352 346 -1.7% 377 / 193
    HDFC BANK 720 709 -1.6% 765 / 448

  • VSNL led the pack of losers in the Nifty index this week (down 7%). This was seemingly on the back of the news that the government's plan to divest the balance 26% stake in the telecom company has hit the road block, because if it does so, it will stand to loose control over the 773 acres of surplus prime land valued at Rs 10 bn, in various cities. It can be recollected that as per the shareholders' agreement between the government and the Tata Group, post divestment, VSNL is to be de-merged into two companies. One would be the telecom company, VSNL, under the Tata's, while the second would be a company owing the land and would remain under Government control. Other telecom stocks

With this week's gains, the Sensex is trading at 18.7 times its trailing 12-month earnings, which is by no means attractive. In fact, we believe that it is over-valued in the short-term as much of the FY06 growth seems to be already priced in. Further, as we enter the results season, it must be noted that there is seemingly significant optimism with regards to India Inc.'s September quarter performance, which if fails to meet investors' expectations, could pose some problem for the markets. This is because the current valuations do not leave much margin of safety and any falter on the deliverables by India Inc. would not go down well with the markets.

Going forward, we believe, with little value left on the table for investors across sectors/stocks, it is advisable to just sit back and introspect about the sustainability of this liquidity driven euphoria. It would be a wise move now to think about what could go wrong that could lead to investors, especially FIIs, pulling out their investments from Indian equities. While our concern should not be construed as if we are bearish on the markets, since we continue to believe that Indian equities is one place to remain invested in for the next 3 to 5 years, we do believe that investors must now strictly follow a bottom-up approach in investing and avoid getting lured by rumours/news and extra-ordinary stock price movements. Happy and safe investing!

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