Most analysts had predicted a correction after the Sensex scaled the 8000 mark last week. They expected institutional investors to book some profits as the markets appear to be overheated in the short term. In fact, many overseas brokerages who had called the markets as overvalued when the Sensex was at 7000, were predicting a more than 10 per cent correction. All of them were proved wrong as the markets continued to seek new levels with barely a pause during the week.

Sensex crossed the 8100 mark on Monday itself and continued the uptrend to touch 8200 by Tuesday. Nifty closed at 2500 on Tuesday as strong buying was seen in frontline banking, auto and telecom stocks.

Indices corrected in intra-day trades on Wednesday as profit booking emerged at higher levels, though late buying reduced the losses. The Sensex added more than 90 points each on 2 successive days on Thursday and Friday. Heavy buying was seen on select heavyweights like ONGC, TCS, Reliance, HDFC and Bharti. The Sensex closed well above the 8300 mark and the Nifty crossed 2550 on Friday.

The Sensex gained 243 points or close to 3 per cent during the week and the Nifty added 68 points or two and three quarters of a per cent over the week.

Mid-caps also maintained the momentum during the week though gains for the week were lower than the frontline stocks. The CNX Mid-Cap 100 index opened the week on a strong note on Monday, gaining more than a per cent to close above the 3800 mark for the first time. The market correction on Wednesday affected the smaller stocks more. The mid-cap index added 56 points or one and a half per cent during the week.

Domestic economic and regulatory action

• Foreign trade trends during the first quarter presents and interesting picture. Total exports during the quarter increased by 22 per cent in dollar terms as compared to the previous year to cross $21 billion. Growth in imports was higher at 34 per cent during the quarter.

  The best performers among the export sectors were petroleum products, machinery and minerals. Petroleum products exports surged more than 50 per cent to over $2 billion. Machinery exports were also higher by more than 50 per cent and at over $2.2 billion were the second largest export item after gems and jewellery. The decline in commodity prices globally did not have much of an impact on exports of ores and minerals, which increased by more than 30 per cent.

  Though aggregate exports by the textile sector grew only 4 per cent during the quarter, there are signs that textile exporters are finding their feet in the post-quota world. Garment exports were higher by 10 per cent in value terms during the quarter. This is an encouraging performance, given the fact that there is considerable pressure on prices in the international markets because of large scale Chinese exports.

  Imports of machinery surged by over 56 per cent during the quarter to over $3 billion, confirming the continuing upswing in industrial investments. Import of transport equipment almost doubled to over $600 million. Import of crude oil went up by close to 30 per cent to cross $9 billion during the quarter.

• The move by the oil ministry to appoint politicians as independent directors on the boards of PSU's is a highly deplorable move and would undermine the concept of independent directors on the boards of public sector companies. The list forwarded by the ministry to the department of public enterprises has names of second and third rung politicians belonging to the ruling party. None of them have any prior experience in industry and only one or two have experience in government as junior ministers.

  The fact that the ministry could even think about appointing such individuals to the boards of Fortune 500 companies like Indian Oil, HPCL and BPCL is shocking, to say the least. The department of heavy industry is also reportedly contemplating such appointments for companies like BHEL.

  Independent directors are appointed to act as a check on the managements and to protect the interests of minority shareholders. They should necessarily have administrative or business experience or should have proven expertise in a field. They are expected to contribute to board discussions on strategy and business planning. They are also expected to be guardians of corporate governance, financial responsibility and ethical practices. What contributions can a junior politician with a few years' experience in the student wing of a political party make as the director of a company like Indian Oil with revenues of more than Rs1 lakh crore?

  Fortunately, the department of public enterprises is still manned by people with better sense. The department has reportedly rejected these political nominees in the initial stage itself.

• Wholesale price inflation for the week ended 03 September increased to 3.16 per cent from 3.01 per cent for the previous week. The rise in inflation was attributed to higher prices of food articles and energy. Price levels of manufactured goods declined during the week.

Industry update

• FDI in organised retail continues to be a bone of contention between various political parties. Despite the firm support of the prime minister, the left parties supporting the government and the opposition parties are jointly opposing the FDI proposal. They argue that allowing large organised players would lead to closure of small retail establishments and massive unemployment. They cite the experience of the US and many European countries where large retailers like Wal-Mart and Carrefour have pushed many smaller establishments out of business.

  While large organised retail does lead to some disruption for the smaller establishments, the fears expressed against FDI in organised retail are exaggerated. There would always be enough space for niche stores and corner stores which are closer to consumers. Also, there is no doubt that presence of large retailers brings down prices and hence benefits a much larger section of the society. The impact of Wal-Mart on consumer price inflation in the US has been the subject of many academic studies. The potential for employment generation is also very large.

  It is interesting to note that these political parties have so far not voiced any concerns about the spread of Indian owned large retail companies. Their primary concern, loss of jobs, can be held against Indian owned retail companies as well.

  Domestic retail companies are also against FDI as they want a protected environment in the medium term to establish themselves before the sector is opened up for large multinational companies. That leaves one wondering whether the political opposition is because of a real concern for job losses or is a result of lobbying by domestic companies.

• The India Retail Forum held this week has thrown up some rosy projections for the organised retail trade. All the participants in the summit were gung ho about the potential of the sector to return high double digit growth rates over the next many years.

  Total retail space under the organised players is expected to go up to 90 million square feet by 2007 from around 30 million at present. This would involve an investment of nearly Rs40,000 crore as the retail chains expand to smaller cities across the country.

  Total revenues for the industry, including the unorganised sector, are projected at a staggering $250 billion or around Rs10 lakh crore per annum by the year 2010. The organised sector would account for only about 10 per cent of the total or $25 billion in annual revenues by then. In other words, the unorganised sector would more than triple its revenues to $225 billion in another 5 years.

  This should take the wind out of most of the arguments seeking protection for smaller establishments. But the opponents to FDI in retail have already pointed out that just one company, Wal-Mart, already has revenues in excess of $250 billion. Does that mean Wal-Mart can come in one fine day and wipe out all the small shops in the country, just because it is a giant? Political parties, especially the left, are adept in taking arguments in pointless directions and making them appear sound and intelligent.

• Indian retail companies are drawing up ambitious plans to expand their reach across the country. Going by the scale of their plans and the speed at which they want to implement them, it appears as if they are preparing themselves before the Wal-Marts and Carrefours of the world set shop in the country.

  The most aggressive among the lot is also the largest organised retailer in the country today, Pantaloon Retail. The company is planning to add no less than 45 hyper market stores under the Big Bazaar brand by the end of 2006. The company would also add many more stores under other formats like Pantaloon, Fashion Station and Home Town. By 2007, the company is planning to have at least 10 million square feet of retail space.

  Other large players like Trent and Shopper's Stop are no less ambitious. Bother these players have so far concentrated on garment retailing. Since the growth is now in other segments like groceries, home products, music etc these companies are also opening large format multi-product stores. Trent has launched its hypermarket brand Star India Bazaar, which are already doing well. The company is believed to have huge expansion plans though, being a Tata group company, it is very guarded while announcing plans. Shopper's Stop is also opening a chain of hyper markets.

  Unfortunately for those contemplating investment in retail stocks, all the listed companies are quoting at very rich valuations. Most of the growth potential and expansion plans have already been captured in the stock prices of all the three listed stocks, Pantaloon, Trent and Shopper's Stop. All the stocks are quoting at forward earnings multiples in excess of 50, with Pantaloon the most expensive because of its more aggressive expansion plans. Unless investors have a very long investment horizon, fresh investments may not be worthwhile. Existing investors with a long term outlook can hold on to their investments.

• Away from the limelight, Reliance Industries is believed to be quietly readying itself for a large roll out in retailing. The company's retail foray would revolve around the fuel stations it is planning across the country, along the highways and in smaller towns. There are reports that senior executives of Reliance have spent considerable time in the US over the last 2 years studying various retail formats.

  The company is planning to set up around 600 fuel stations in the next few years which would have retail stores for general merchandise, food stations and restaurants. Reliance would also develop the land around these outlets and lease out space to retailers and restaurant chains like McDonalds. Reliance has the resources and experience in implementing large scale projects to pull off such an ambitious venture. Investors interested in an exposure to organised retail, keep an eye on Reliance!

US markets, economy and oil

• US markets had a subdued week as traders worried about corporate earnings in the wake of the destruction caused by Hurricane Katrina. Uncertainty about the next move on interest rates by the US Fed in its meeting scheduled next week also made traders and investors sceptical.

  After opening the week on a flat note on Monday, the US indices faced selling pressure on Tuesday and Wednesday before stabilising and recovering on Friday. For the week, the Dow and S&P 500 lost one third of a per cent each while losses on the NASDAQ were higher at over two thirds of a per cent.

• Crude prices continued to decline during the week as the first signs of a decline in demand because of higher prices are emerging in many countries across the globe. Oil cartel OPEC has reduced its demand forecast because of lower than expected demand in the US and China.

  An unexpected drop in US fuel inventories led to a recovery in crude prices on Wednesday, but the gains were not sustained as the week progressed. Reports that the International Energy Agency has stopped emergency crude oil supplies to the US to fill the production shortfall caused by hurricane did not have much of an impact on crude prices. The commodity lost almost 3 per cent on Friday to close at $63 to a barrel. Crude lost more than 3 per cent during the week on the NYMEX.
  

*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.