Markets rode the momentum built up last week and continued to seek new ground in the first two trading sessions of the week. Buying support from foreign investors as well as domestic mutual fund activity helped the market to post all time highs. Wednesday saw a small decline on profit booking and on Thursday our market bucked the weak trend in most of the global markets. The market gave up most of its gains on Friday on worries of foreign inflows turning negative. The indices closed the week with very marginal gains.
World markets also saw a positive trend throughout the week except for Thursday when worries about rising oil prices and inflation pulled the indices down. In the US, Dow Jones index moved closer to the 11,000 mark while in Japan the NIKKEI is close to 12,000.
Crude continued to climb to record levels raising fears of worldwide inflation. The NYMEX light sweet crude for April delivery crossed $55 to a barrel after declining on Thursday. A major oil and gas discovery in Iran had no impact on oil markets as it takes years to develop new fields.
The ever increasing energy demand in emerging economies like China and India has pushed oil prices to levels not seen after the last oil crisis. Oil companies failed to make fresh investments in increasing production in the last decade, as oil prices remained low. Oil cartel OPEC argues that current prices, though high in absolute terms, is still not high in real terms as the US Dollar has declined close to 30 per cent. The emerging economies, from where most of the oil demand is coming, are forced to absorb higher energy costs as sustaining growth rates is very important to such countries.
Inflation for week ended 26 February inched up marginally to 4.95 per cent as compared to 4.83 per cent the previous week. The increase was mainly on account of increase in prices of manufactured goods while prices of primary articles declined. RBI governor raised concerns over the risk of inflation during the next fiscal as crude oil continues to remain firm.
Economic growth continues to chug along nicely during the current fiscal. The Index of Industrial Production is up 8.4 per cent for the first 10 months of the year as compared to 6.7 per cent recorded last year. The rise in manufacturing output of 9.3 per cent for the month of January this year, points to the increasing momentum in this sector. Capital goods output is also rising indicating additional investments in capacity generation. The RBI has indicated that it may revise upwards its early growth estimate of 6.5 per cent.
Credit off take from commercial banks continues to post robust growth. The two largest banks, SBI and ICICI Bank, are experiencing unprecedented credit demand from industry. ICICI Bank estimates investments of Rs250,000 crore by industry over the next few years.
- ONGC received government permission to invest in Sakhalin-III oilfield in Russia. The company is also planning to bring in crude from Sakhalin-I field, in which it is a stake holder, to India.
- Tata Motors launched its fully built range of buses and coaches this week. The company is outsourcing the body building to select vendors under its supervision. The company is targeting a turnover of $1billion from this line of business over the next few years.
- Reliance Industries intends to open 2,000 retail petrol outlets by March 2006. The company is also on the lookout for oil assets abroad.
- Essar Oil plans to set up 2,000 retail fuel outlets by next year and increaser it to 5,000 after three years. The company's oil refinery is expected to go on stream next year.
- Tata Steel will invest around Rs3,000 crore in the proposed Bangladesh steel plant and is scouting for acquisition targets in East Asia and China.
- The board of Bank of Rajastan approved sale of 14.75 per cent stake to institutional investors. French banking major Societe General is believed to be negotiating for a 5 per cent stake.
- Cadila Healthcare announced a tie up with US generics major Tyco for marketing generic pharmaceutical products in the US.
- TASC Pharmaceuticals decided to merge with Glenmark Laboratories.
- Aban Lloyd Chiles, NIIT, Nicholas Piramal and Srei Infrastructure Finance approved plans to raise resources from overseas issues.
- Zensar Technologies bagged a major deal from Nomura Securities of Japan for technology migration services.
Prime movers this week
Titan Industries: Titan is a Tata group company in which the Tamil Nadu government also holds a stake through TIDCO. The company is the largest manufacturer and marketer of wrist watches in India and has an extensive retail network all over the country. It has a very strong brand image and in-house design and development facilities. The company made a major foray into the European markets a few years back. It also entered the branded jewelry segment with its brand Tanishq. These two forays involved huge investments in marketing and stocks and affected the financial performance of the company. The company is highly leveraged and the share is expensively valued going by current financial performance. However, the company plans to raise additional equity to reduce the debt burden. It is also introducing new lifestyle products like sun glasses to take advantage of its brand image and retail network.
Trent Limited: Trent Limited, another Tata group company, is managed by Noel Tata who is considered by many as the successor to Tata group chairman Ratan Tata. Trent is one of the largest organised retail players in the country best known for its Westside chain of stores. This company has received much attention from foreign investors along with industry leader Pantaloon. The ongoing retail boom in the country offers tremendous opportunities to the company. However, the stock is richly valued for the current financial performance.
Aban Lloyd Chiles Offshore: The stock has been one of the largest percentage gainers in 2004 and continues to run up in the current year as well. The company owns and operates oil exploration rigs and is based in Chennai. The increased focus on oil exploration under the National Exploration and Licensing Policy (NELP) which is into phase IV now, opened up a lot of opportunities for companies like Aban Lloyd. To take advantage of the ongoing boom, the company has added to its capacity and expects substantial growth during the next financial year. The company is also planning to raise resources by way of a GDR issue. The stock is not very liquid as it is trading around Rs1,900 per share and the promoters hold more than 60 per cent. The company is planning a stock split which would improve liquidity. Most of the run up in this stock has happened though scope for appreciation exists in the long term.
McDowell: McDowell is the flagship company of the UB group and the largest player in the alcoholic spirits segment. Though the company holds close to 40 per cent market share in India, the valuation was always low because of financial under performance and issues of corporate governance. Even now, the reported margins are low for a dominant liquor company. However, India is one of the fastest-growing spirits market in the world and offers tremendous opportunities considering the demographic profile of the population and the increasing purchasing power.
The UB group is in the process of acquiring Herbertsons, the third largest player, and has bid for the spirits business of its largest competitor Shaw Wallace. If it is successful, this combine would be the most dominant player in the domestic market and the second largest spirits group in the world by volume. Spirits companies in emerging markets like China and Latin America receives very high valuations. This would be the case in India as well as the market matures in future. Investors should note that the beer business, which receives better valuations, of UB group is not under McDowell but under the group company United Breweries.
Outlook: FII's continue to be net buyers in the Indian market. They were net buyers to the extent of $300 million on Thursday. This should give the required momentum to the market early next week and the Sensex may try to scale the peak of 7,000. A deeper correction can be expected after this event.
*Disclaimer: The author doesn't have any position in the stocks specifically mentioned above at the time of writing this article. This analysis/report is only for the purpose of information and is not an investment advice. Readers are advised to consult a certified financial advisor before taking any investment decisions. While efforts have been made to ensure the accuracy of the information provided in the content the author or publisher shall not be held responsible for any loss caused to any person whatsoever.