Some sign's of correction were yet again seen this week and this time the correction was largely driven by global issues. US economy continues to shed tears on worsening housing market. No one is clear about how much more the housing market has to worsen before it gets better. FIIs have been sellers in a big way and hence caution prevailed across the board. There were talks that SEBI rejected a few applications and that led to disapppointment. We doubt such a case. The rejetions probably meant more information requirement by SEBI. They would eventually they would come back with that. For now the objective for the RBI is to slow down the inflows a bit and they have the leverage to do that. Indian markets pared off gains but as expected it continued to be buoyant and recovered in late trading sessions on each trading day on value buying. There was some hope of the Nuke deal getting finalised as the Left softened their stand on talks with IAEA. But it is really difficult to comment whether the deal will go through or not as politics is remains as unpredictable as ever.
Most large cap counters were down but Banking was the strong one. This is the one counter where is very first to benefit from a rate cut and thats being expected. SBIs was hot on the rights issue. There is also the market hope of acquisition in mid cap banks. All said and done "one thing we believe is that Indian interest rates are unlikely to rise. A cut in CRR / bank rates is what the RBI could be thinking off. The big question is when. We don't see signs for that yet but we expect one certainly before the end of this fiscal. And when you have interest rates headed down.. you wont see a bear market." This is why we hold the opinion that markets will be ranged struggling between valuations in some and flows on the other.
IT continued to be underowned and we don't see any drastic change happening here in short run. ICICI CEO K V Kamath warned that the Rupee would strengthen by 1 or 2 against the dollar each year, irrespective of whatever was done to check the rising Indian currency. We do not disagree with that. However, factors against a strong rupee could be high crude oil prices which will put pressure, lower growth itself for the IT sector where business conditions may not remain as sanguine. Slower growth itself for the economy and to add to that would be coming elections when the Government tends to lose its purse strings and ignores deficits. Do read economy taking stock !
Markets this week: Sensex ended down by 4%; Nifty slipped 5%; Reality cap goods and FMCG ended down by 6%; Oil and gas index ended down 4%; IT index down 3%; Mid cap index down 4%; Banking and Metal index down 4%; Smal Cap index down 2%; Maruti, Suzlon and MTNL down 10%; Bajaj 9% up; IOC 20% down; Nalco down 18%; VSNL and BHEL down 9%; TATA motors up 3%; KEC infra down 22%; UCO up 12%; REL down 5%.
TC was in news. The stock rallied sharply in the last few days followed by some profit taking as well. It was in the news for eyeing Parle's Candy business and earlier Parrys confectionary as well. It is pursuing growth opportunities through acquisitions across categories. Parle Products confectionery basket includes strong heritage brands such as Poppins, Kismi, Melody, Mango Bite, Rol-a-Cola, Mints and Orange Candy, among others. ITC has two confectionery brands, Candyman and Mint-O Fresh in its portfolio. ITC has been extremely aggressive. We have been cautious on ITC largely on the back of its Management which has been at loggerheads with BAT (34% stake in ITC). ITC has been managed as a personal fiefdom with expansions across categories including, FMCG products including agarbattis, Matchboxes, garments and now shampoos, Confectionary apart from its mainstay of cigarettes, Hotels and Paper. The idea is to use the cash thrown up by the strong cashflow business of Cigarettes. The bet is that BAT will come in eventually. However we dont think there is much value even then.
Everest Kanto: CLSA mid cap conference brought in some interest here. Everest Kanto is one of the leading high pressure steel cylinder manufacturers in the world for two main applications - industrial and CNG (compressed natural gas). CNG is expected to be the key growth driver going forward. EKC is uniquely positioned to do so because of its long term raw material sourcing relationship with Tenaris. We agree that EKC has certainly done well. The company has enjoyed first mover advantage and that can be seen from the revenue growth and exponentially high margins. The margins we believe are unsustainable over the longer term. We see no sustainable competitive advantage in this business. Clearly a case of optimistic exuberance.
Bata: Business is doing well here.. and that may deliver. The recent run up we believe has more than priced it in. However, its surprising to note that the company spends less than 1% on brand building. Of course the big upside in this is the realisation from of the property in Calcutta. It?s the quantum and the time frame for receiving that.
Solar Explosives: This company recently acquired a 74% stake in company which is looking to acquire a coal mine and not an explosives company as we had anticipated. Some reason to cheer here.. though valuations we believe are pricing in quite a bit of optimism. The mystery element is the mine it will get. Apparenlty the mine size could be around 30 - 40 mn tonnes. Solar would thus benefit from largesse received from the Government as a coal mine but its core competency is the explosives business and thats where it will do well. We are convinced on that.
We believe that its unwise to pick tops and bottoms and lets just have a strategy in the current environment. We believe that the "Callous" comfort of market direction has the possibility to hit markets badly. Valuations have been stretched in the large cap companies and these excess could cool off. The Companies such as Reliance Energy, Reliance Petroleum, RNRL, Essar Oil where the run ups have been on the back of skewed logic. Of course valuations of Reliance Larsen, BHEL, ABB are others which could be made to eat humble pie.
In such a scenario it will be tough for Mid caps to hold out. There has been a strong run up in the mid caps. Quite a bit of that has already come off on profit taking. We believe Markets could head to the lower level of the range. One crucial support which may sound extremely bearish now is around 15100 levels for the Sensex. But that would be an extreme case of negativism. Its unlikely to be a sharp fall as the underlying Momentum, the cash on the sidelines, the "Left Out" feeling will have supports coming in at each lower level of support which would result in bounce at every fall. But, we would recommend to get into some value stocks with sound fundamentals rather than getting carried away with the rally.
Technically Speaking: As we mentioned of 18900 levels, Sensex failed to cross this levels for the second day. On Monday if it crosses this 18900 levels could take us to 19100+ levels. But If failed we could see 17200 levels.
Most large cap counters were down but Banking was the strong one. This is the one counter where is very first to benefit from a rate cut and thats being expected. SBIs was hot on the rights issue. There is also the market hope of acquisition in mid cap banks. All said and done "one thing we believe is that Indian interest rates are unlikely to rise. A cut in CRR / bank rates is what the RBI could be thinking off. The big question is when. We don't see signs for that yet but we expect one certainly before the end of this fiscal. And when you have interest rates headed down.. you wont see a bear market." This is why we hold the opinion that markets will be ranged struggling between valuations in some and flows on the other.
IT continued to be underowned and we don't see any drastic change happening here in short run. ICICI CEO K V Kamath warned that the Rupee would strengthen by 1 or 2 against the dollar each year, irrespective of whatever was done to check the rising Indian currency. We do not disagree with that. However, factors against a strong rupee could be high crude oil prices which will put pressure, lower growth itself for the IT sector where business conditions may not remain as sanguine. Slower growth itself for the economy and to add to that would be coming elections when the Government tends to lose its purse strings and ignores deficits. Do read economy taking stock !
Markets this week: Sensex ended down by 4%; Nifty slipped 5%; Reality cap goods and FMCG ended down by 6%; Oil and gas index ended down 4%; IT index down 3%; Mid cap index down 4%; Banking and Metal index down 4%; Smal Cap index down 2%; Maruti, Suzlon and MTNL down 10%; Bajaj 9% up; IOC 20% down; Nalco down 18%; VSNL and BHEL down 9%; TATA motors up 3%; KEC infra down 22%; UCO up 12%; REL down 5%.
TC was in news. The stock rallied sharply in the last few days followed by some profit taking as well. It was in the news for eyeing Parle's Candy business and earlier Parrys confectionary as well. It is pursuing growth opportunities through acquisitions across categories. Parle Products confectionery basket includes strong heritage brands such as Poppins, Kismi, Melody, Mango Bite, Rol-a-Cola, Mints and Orange Candy, among others. ITC has two confectionery brands, Candyman and Mint-O Fresh in its portfolio. ITC has been extremely aggressive. We have been cautious on ITC largely on the back of its Management which has been at loggerheads with BAT (34% stake in ITC). ITC has been managed as a personal fiefdom with expansions across categories including, FMCG products including agarbattis, Matchboxes, garments and now shampoos, Confectionary apart from its mainstay of cigarettes, Hotels and Paper. The idea is to use the cash thrown up by the strong cashflow business of Cigarettes. The bet is that BAT will come in eventually. However we dont think there is much value even then.
Everest Kanto: CLSA mid cap conference brought in some interest here. Everest Kanto is one of the leading high pressure steel cylinder manufacturers in the world for two main applications - industrial and CNG (compressed natural gas). CNG is expected to be the key growth driver going forward. EKC is uniquely positioned to do so because of its long term raw material sourcing relationship with Tenaris. We agree that EKC has certainly done well. The company has enjoyed first mover advantage and that can be seen from the revenue growth and exponentially high margins. The margins we believe are unsustainable over the longer term. We see no sustainable competitive advantage in this business. Clearly a case of optimistic exuberance.
Bata: Business is doing well here.. and that may deliver. The recent run up we believe has more than priced it in. However, its surprising to note that the company spends less than 1% on brand building. Of course the big upside in this is the realisation from of the property in Calcutta. It?s the quantum and the time frame for receiving that.
Solar Explosives: This company recently acquired a 74% stake in company which is looking to acquire a coal mine and not an explosives company as we had anticipated. Some reason to cheer here.. though valuations we believe are pricing in quite a bit of optimism. The mystery element is the mine it will get. Apparenlty the mine size could be around 30 - 40 mn tonnes. Solar would thus benefit from largesse received from the Government as a coal mine but its core competency is the explosives business and thats where it will do well. We are convinced on that.
We believe that its unwise to pick tops and bottoms and lets just have a strategy in the current environment. We believe that the "Callous" comfort of market direction has the possibility to hit markets badly. Valuations have been stretched in the large cap companies and these excess could cool off. The Companies such as Reliance Energy, Reliance Petroleum, RNRL, Essar Oil where the run ups have been on the back of skewed logic. Of course valuations of Reliance Larsen, BHEL, ABB are others which could be made to eat humble pie.
In such a scenario it will be tough for Mid caps to hold out. There has been a strong run up in the mid caps. Quite a bit of that has already come off on profit taking. We believe Markets could head to the lower level of the range. One crucial support which may sound extremely bearish now is around 15100 levels for the Sensex. But that would be an extreme case of negativism. Its unlikely to be a sharp fall as the underlying Momentum, the cash on the sidelines, the "Left Out" feeling will have supports coming in at each lower level of support which would result in bounce at every fall. But, we would recommend to get into some value stocks with sound fundamentals rather than getting carried away with the rally.
Technically Speaking: As we mentioned of 18900 levels, Sensex failed to cross this levels for the second day. On Monday if it crosses this 18900 levels could take us to 19100+ levels. But If failed we could see 17200 levels.
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