Markets steady during the week despite profit booking

Markets opened the week on a steady note with the indices holding ground on Tuesday after a long weekend. The exuberance was back in full flow on Wednesday as oil and technology stocks powered the indices to new lifetime highs. The Nifty managed to close above the 2400 level for the first time ever.

The surge on Wednesday was led by ONGC, which rallied well over 4 per cent on heavy institutional buying. Reliance Industries, Infosys and TCS were the other significant gainers among the large caps.

The last two days saw some profit booking and the indices declined. The correction was measured and there was no panic despite some volatility. It was more like the markets searching for a clear direction following the lacklustre performance of global markets, record crude prices and confusing signals from the government on further reforms including disinvestment.

The frontline indices closed the week with marginal gains. Nifty could not close the week above the 2400 mark and the Sensex too drifted below the 7800 levels by Friday.

Mid-caps more or less tracked the movements in frontline stocks. The first two days of the trading week saw the mid-cap index closing with gains, part of which were given up on profit booking during the last two days. The CNX Mid-Cap 100 index managed to close with gains for the week and well above the 3600 mark.

Domestic economic and regulatory action

  • The government has formally cancelled the disinvestment process in 14 PSU's through the strategic stake sale route. These include Nalco, Rashtriya Chemicals, HPCL and Shipping Corporation. These companies were among a group selected by the previous government for disinvestment, but the process was delayed after some early successes like Maruti, VSNL and IPCL.

    The finance minister keep on insisting that this is not the end of the disinvestment programme. He also stated that the strategic stake sale route has been proved to be inappropriate, as it has raised more questions than answers. Neither the minister nor any other pro-reform face in the government has offered any alternate methods or strategies so far.

    The government says it is continuing the discussions with the left parties on stake sales through the public issue route. These statements don't even pass as posturing as the left has categorically stated that they will not allow any kind of stake sales in PSU companies.

    Unlike the central government, the Congress government in Punjab firmly believes in divesting its stake in state PSU's even if they are profit making. The state government is planning to sell its 44-per cent stake in Punjab Alkalies within the next one month through the strategic stake sale route. Evidently, the union finance minister has so far not passed on his thoughts about the relative de-merits of strategic stake sales to his party men in Punjab!
  • The Bombay Stock Exchange, Asia's oldest, started a new chapter as a limited company yesterday, after 130 years of existence as an association of persons. The memberships of brokers have been converted into equity shares along with a grand of trading rights. Trading rights will no longer be connected to shareholding in the exchange.

    The new company would have to dilute the total equity holdings of brokers to at least 49 per cent from the current 100 per cent as per SEBI guidelines. The exchange said it is evaluating various options including sale of strategic stake to large investors. The exchange would also consider an IPO, which would make it the first listed stock exchange in the country.

    The corporatisation of the BSE would hopefully bring in much needed professionalism and transparency. Despite being the older exchange, volumes on the BSE are much lower than that on the NSE though the number of shares listed on the latter is only one fifth of that on the BSE. Till a few years back, the BSE was more like a broker's club with scant regard to investor protection.

    Even now, the disclosure and governance standards imposed by the BSE on listed companies are more lenient than the NSE. Majority of the companies listed on the BSE are very small with hardly any analyst tracking them. These stocks often see suspicious price movements as a few operators can manipulate the shares with low floating stock. Even this week, hundreds of such small stocks listed on the BSE were hitting the upper circuit limits almost on a daily basis.

  • As per media reports, a member on the board of market regulator SEBI got carried away during the launch of the new BSE and gave his own take on the potential upside to the Sensex. This gentleman is confident that the index can double from the current levels and touch 16,000! To make it more incredible, he expects this to happen not in the long term but over the next one year!! The statement would have surprised even the brokers present at the ceremony.

    The honourable SEBI member also assured 'all help' from SEBI to the BSE in 'achieving' this target. Yes, according to SEBI, the primary business target of the corporatised BSE should be to take the index to 16,000 within a year! Maybe SEBI should start a hedge fund with such proactive bulls on its board!

    Since when has the market regulator got into the business of giving index forecasts? Do these worthies, for at least a moment, think about the consequences of such irresponsible statements? Instead of spending their energies on enforcing better disclosure norms and investigating unusual stock price movements, senior officials of SEBI are adding more fuel to the fire. Does the SEBI chairman endorse the views of his colleague or does he have his own forecast to make? Maybe, Sensex 20,000 is a target worthy of a chairman since a mere member has already predicted 16,000!

  • Inflation has dropped further as per the latest data available. Wholesale price inflation for the week ended 30 July declined to 3.35 per cent from 3.84 per cent for the previous week. While food prices declined by a per cent because of cheaper vegetables and marine products, prices of non-food primary articles was lower after a 5 per cent decline in prices of natural rubber. Prices of manufactured articles remained steady. Energy prices also declined because of a drop in furnace oil, cheaper by 5 per cent.

Industry update

  • Doubts were raised about the preparedness of the Indian textile industry to take advantage of the post quota regime on the face of intense competition from China. These concerns became stronger after textile exports from the country to global markets declined by 12 per cent during the first three months of the calendar year.

    There are clear signs that the industry is learning its ropes in the new world order after the initial difficulties. Textile exports to the US has jumped 24 per cent during the first six months of the calendar year. Restrictions imposed by the US on Chinese imports of garments may have been a positive factor for Indian exporters.

    Though growth in Chinese textile exports to the US have been far higher at over 45 per cent, unit realisations on Chinese products have fallen. In contrast, unit realisations of Indian exports have actually increased by close to 10 per cent. This was made possible by focussing more on value added products. Though margins have come down as compared to the previous year, the additional volumes would definitely help the major textile exporters to post healthy numbers this year.

    The strong growth in textile output during the April-June quarter also points to robust order flow for textile firms. Output growth for textiles have been the strongest among all manufacturing sectors at over 30 per cent for June as compared to the previous year. Analysts expect export growth to sustain at around 25 per cent for the rest of the year.

    However, structural problems may prevent the industry from achieving its full potential. Textile manufacturing is highly fragmented with large mills accounting for only under 5 per cent of total output. India's share in the global textile share is a meagre 3 per cent.

    The government's moves to set up textile parks of global standards across the country should help the organised players to ramp up production capacities in a more organised environment. With some more help from the government, the target of $50 billion from exports by 2010 can easily be achieved. By then, the total industry size, including domestic sales, could easily cross $100 billion.

  • There are reports that the ministry of finance has sent a very strange advice to all PSU banks this week. The ministry wants all advertisements by the state- owned banks to be routed through the publicity wing of the government, called DAVP. This department has so far handled only tender notices and commemorative advertisements on anniversaries and special occasions with smiling mug shots of politicians.

    When the PSU banks have to compete with the aggressive private sector players and large foreign banks, does the ministry really believe that the DAVP can provide marketing support and brand management? Or is this an attempt to bring the 'lofty' PSU standards to the advertisement industry as well? Thankfully, the attempt at 'in-sourcing', or meeting all PSU requirements for services by other PSU's or government departments, has not gone down well with most bank managements.

    Surprisingly, such hare-brained ideas keep coming at regular intervals from a ministry headed by a pro-reform mascot. Very often, the ministry forgets the basic concepts of reforms and governance all too easily for a few rupees of additional revenue.