• JANUARY 7, 2006

Target 10,000...

...or the stars? This continues to remain the million-dollar question on the minds of every investor, big and small, as the bulls seem little deterred by the already-rich valuations of Indian equities. The volatility-filled rally on the Indian bourses continued this week also, with investors, armed with hands full of money generated from across the globe, pushing the Indian indices higher into uncharted territories, providing little solace to those who have exited the markets in view of the demanding valuations. Thus, at the end of the current week, the benchmark indices notched gains of about 3% each. However, the real action was in the mid and small cap segments with the respective indices gaining 4.5% and 3.8%.

The markets started the year (Monday was the first trading day of the calendar year 2006) on a buoyant note, with the BSE-Sensex creating another lifetime high in opening trades at 9,450+. However, this optimism lacked conviction, as investors opted to book profits and the Sensex ended the day marginally in the red. However, the next two trading sessions were different ballgames altogether, as the bulls came back with all their might and powered the Sensex into newer orbits, breaking records along the way. By the end of the trading session on Wednesday, the Sensex was convincingly perched at about the 9,650 levels.

However, the tables turned during the following two trading sessions as bears made their presence felt by booking profits at the slightest hint of strength in the markets, thus, keeping the indices under pressure almost all the time. Nonetheless, they could not prevent the Sensex from breaking (old) and creating (new) records, as Thursday's new lifetime highs were breached during the opening hour of Friday's trading session.

On the institutional activity front, while Foreign Institutional Investors (FIIs) inflows accelerated in the first 4 trading sessions of the week as they pumped in nearly half-a-billion dollars (Rs 19.4 bn or US$ 432 m), domestic mutual funds continued to book profits, as they pulled out about Rs 3.4 bn (US$ 76 m). What aided FII inflows was a statement by the Fed, which hinted that its 18-month policy of raising interest rates might soon come to an end. This led to the dollar losing ground against most Asian currencies, including that of India, as foreign investors lapped up non-dollar denominated assets, leading to a gush of liquidity into other markets, including emerging markets.

Apart from all of the above, a few IPOs made their debut on the Indian bourses this week (see table below).

New listings during the week
Company Allottment Price Price on Jan 6 (Rs) % Change
Tulip IT Services 120 192 60.4%
Punj Lloyd 700 1,058 51.1%
PVR Ltd. 225 275 22.4%

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

  • Banking sector stocks enjoyed renewed investor interest in the past week, with optimism on the back of higher yields on credit and comfortable liquidity position. The IMD redemptions, which were expected to squeeze out liquidity from the system, did not have a very pronounced impact on the sector due to RBI intervention. Also, the fact that incremental credit growth has continued to be robust during 3QFY06 enhanced investors' earnings expectations from the sector. In addition to this, the news of banks having raised corporate lending rates by as much as 200 basis points without tampering with the prime lending rates (PLRs) added some comfort to apprehensions about margin (NIM) pressures.

    Top gainers over the week (NSE-50)
    Company Price on Dec 30 (Rs) Price on Jan 6 (Rs) % Change 52-Week H/L (Rs)
    BSE-SENSEX 9,398 9,640 2.6% 9,681 / 6,069
    S&P CNX NIFTY 2,837 2,914 2.7% 2,922 / 1,894
    IPCL 236 260 10.1% 262 / 156
    GUJ. AMBUJA 80 87 9.4% 91 / 49
    GLAXO 1,122 1,222 8.9% 1,261 / 665
    HCL TECH. 539 586 8.8% 593 / 295
    HDFC BANK 709 769 8.5% 775 / 448

  • MNC pharma major, Pfizer India, is focusing on reducing the time lag between global product launches and Indian launches by about half. It has indicated a strong focus to increase its product portfolio in the domestic markets through new product launches from its parent's product stable. Also the company is envisaging a double-digit growth for the year ending November 2006. The new product launches are positive steps taken by the company and will contribute to its topline performance in the long term. The stock ended the week higher by 12%. Other pharma stocks

  • Aluminium stocks continued to be in the reckoning during the week with Hindalco and Nalco both gaining 8%. This was owing to the fact that the price of aluminium has been raised yet again by Rs 3,500 to Rs 4,000 per tonne. This is the fifth time in the last four months that domestic aluminium companies have raised prices, taking the cumulative hike to almost 18% to 20% in this period. Sustained strong demand for the metal coupled with the lack of adequate supply owing to shortage of smelters has resulted into aluminium getting dearer. It must be noted that in the last couple of months, while Hindalco has notched gains of over 30%, Nalco has gained about 48%. Other aluminium stocks

  • Auto stocks were also in the limelight this week. The 5% gains in Maruti could be attributed to the good set of volume numbers reported by it for December 2005 aided by growth in domestic sales led by ‘Swift' and also to the divestment news surrounding the company. As far as the gains in Bajaj auto (2%) were concerned, the company has chalked out a detailed strategy to tap the rural potential demand. For this purpose, the company is also tying with NABARD, NGOs and other self-help groups. This strategy is of significance, as currently, the penetration level in rural household is just 7% as compared to 50% in urban areas. However, this is likely to take atleast two years before the benefits are reaped. Other auto stocks

  • Cement stocks were back onto investors' radar this week as cement prices improved further by about Rs 3 per bag, a consequence of 10%-18% rise in truck rentals post the Supreme Court's recent judgment banning overloading of trucks. Going forward, with the outlook for cement demand remaining robust and the supply growth likely to remain a tad slower, the outlook on cement prices continues to remain promising. While there was across the board buying in cement stocks aided also by the news of good December 2005 despatches numbers, Gujarat Ambuja gained a handsome 10% on the back of rumours that Holcim, which recently acquired a near 35% stake in ACC, along with Gujarat Ambuja, is likely to pick up a stake in Gujarat Ambuja at a significant premium to the market price, which led to investors scurrying for the stock. However, both the parties have denied any such development. Other cement stocks

Top losers over the week (NSE-50)
Company Price on Dec 30 (Rs) Price on Jan 6 (Rs) % Change 52-Week H/L (Rs)
HLL 197 194 -1.9% 201 / 126
CIPLA 448 441 -1.6% 452 / 212
TATA MOTORS 653 647 -1.0% 679 / 400
JET AIRWAYS 1,144 1,136 -0.7% 1,383 / 971
TATA TEA 949 945 -0.4% 971 / 445

To conclude, next week would see that start of trickling in of India Inc.'s December quarter results, which could lead to some volatility on the bourses as investors match their projections with the actual results delivered by corporates and then re-align their expectations. However, while the performance of India Inc. during the December quarter would be revealed over the next 2-3 weeks, one thing is for sure that at current valuations of 19 times trailing 12-month earnings (Sensex), there is little scope for below-than-expected performance deliverance by Indian companies.

Having said that, even if the 3QFY06 results turn out to be good, there seems little fundamental scope for an appreciation in most of the sectors/stocks. Investors must note that the Indian stockmarket rally, especially since the last few months, has been largely liquidity-driven, with money pouring in from all quarters of the world. Thus, at the current juncture, the most prudent thing for an investor would be to invest selectively in fundamentally sound companies with some value still left in them and avoid stocks fancied by the markets, as any reversal in liquidity flows could pose serious threats to the invested capital. Happy and safe investing!

Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (Research Analyst) bearing Registration No. INH000000537 (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA, Canada or the European Union countries, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

Equitymaster Agora Research Private Limited (Research Analyst)
103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407