An interesting feature of this bull run is that indices keep moving up for days without a pause and when the sentiment turn around they decline for days on end. This makes it very risky for retail investors to participate as it is difficult for even seasoned traders to predict the appropriate entry and exit points. Also, price movements are sudden and in large measures. Another feature is the excessive dependence on FII inflows to give direction to the market. When FII’s take a pause market sentiment turns very weak, even if they are not heavy sellers. It is like FII’s are expected to keep buying even when they are sitting on profits and would book part of it in normal course.

World markets also remained weak as the Fed Reserve raised interest rates by 0.25 per cent to 2.75 per cent. Statements by the Fed chairman about inflation spooked the market. There is speculation that future interest rate hikes would be higher than 0.25 per cent. The continued rally in oil prices is adding to the inflation worries.

NYMEX crude for April delivery declined to below $54 on Wednesday as US inventories were higher than expected. Last week this column had mentioned the large speculative activity in crude which is partly responsible for the huge run up in prices. The correction this week even though there was not much change in the fundamentals would give some credence to this. High volatility in prices even on relatively insignificant news like a change in oil inventory indicates heightened speculative activity. So the possibility of a runaway increase in oil prices from these levels is limited. But any development affecting supplies, like a US intervention in Iran, could drive up prices.

Some analysts are pointing to the rise in Middle East crude, which does not have an active futures market, to postulate that this rally is more about demand-supply mismatches than speculation. The price discount for Mid-East heavy crude to the NYMEX light crude has indeed narrowed during this rally as compared to the last year rally. But it is again natural for the Gulf region producers to ask for higher prices when NYMEX and Brent are hitting new highs. It is like a rally in large stocks pushing up prices of small stocks in the same sector, whatever their fundamentals may be.

There are some disturbing signs on the domestic economic front in the form of a decline in the infrastructure index for the month of February. The index declined by 0.6 per cent as compared to last year on lower production of crude oil, electricity and coal. If this trend continues, it could affect the manufacturing revival we have seen recently.

The government’s plans to roll out VAT from 1 April received a minor set back with the opposition playing politics and deciding not to implement VAT in states where they are in power. The government should not allow itself to be browbeaten in this very important piece of tax reform. The dissenting states would gradually come on board as staying out of the VAT framework will erode their competitiveness when compared to the implementing states. 21 states and union territories are going ahead with plans to implement VAT.

The Patent (Amendment) Bill was passed by the Parliament (clearance by the Rajya Sabha is more a formality as the Bill has enough support) this week. The Bill is widely perceived to be more favorable to domestic companies than its original version and the ordinance passed earlier by the government. Apprehensions about a runaway increase in drug prices following the shift to a product patent regime are exaggerated.

Shares of Reliance group companies jumped up on rumors of a final settlement between the brothers. It is disturbing to see such rumors floating around about some of the most valuable companies in the country and the regulators and exchanges doing nothing about it. Even while accepting that ownership issues within the promoter family is within their private domain, the managements of these companies have a responsibility to protect the minority shareholders from such rumors. But instead of being proactive, they make matters worse by remaining silent.

Corporate moves

• Tata Motors is planning to introduce medium commercial vehicles in the South Korean market through its subsidiary Daewoo Commercial. The company may also start assembling cars in South Africa. South Africa has a free trade agreement with Europe and this move may enable Tata Motors to be more aggressive in exports to Europe.
  
• Tata Chemicals is acquiring a 33.3 per cent stake in a Moroccan company Indo Maroc Phosphore. Birla group company Chambal Fertilizers, one of the promoters of Indo Maroc, will also hold 33.3 per cent stake in this company after this deal. Morocco is the largest exporter of both phosphoric acid and mineral phosphate in the world and both are important ingredients in making phosphatic fertilizers.
  
• Tata Steel received stable rating from both Moody’s and S&P for its overseas debt raining programme. The company is expanding its domestic capacity by upgrading existing facilities in the short term. It also plans to set up greenfield plants in Orissa and Bangladesh. The company is increasing prices for long term contracts by 20 per cent which would mean an increase of Rs4000 to Rs4500 per tonne.
• ONGC expects a 40 per cent increase in turnover for the current year. It is planning to set up a new refinery in Rajastan and expand the capacity of its refining subsidiary MRPL to 15 million tones per annum. The company recently started fuel retailing through outlets branded ‘Oval’.
• Satyam announced a deal with global tyre major Bridgestone for ERP solutions on SAP platform. The company says its SAP practice, which has higher margins, is gaining ground.
  
• Mahindra & Mahindra signed a joint venture agreement with French auto major Renault to manufacture the mid size sedan Logan in India. M&M will hold a 51 per cent stake in the JV and Renault will hold the balance. Logan is a low cost model developed by Renault’s Czech subsidiary Dacia for emerging markets like India. The car is expected to be launched in 2007 and the company expects to manufacture 50,000 cars per year. The deal is significant as Renault has indicated that it will look at India as an export base for South Asian and Middle East markets. Renault is one of the stronger companies among the global auto majors and along with associate company Nissan has the resources and right models to penetrate the Indian market.Hexaware Technologies won two orders from the US worth a combined $10 million.
• Hexaware is one of the largest IT service providers on the PeopleSoft platform. Concerns were raised about the future potential of the company after Oracle acquired PeopleSoft. The decision by Oracle to support PeopleSoft for some more years came as a breather.
  
• UB group signed a deal with the Jumbo group of Chabrias to buy a majority stake in Shaw Wallace at Rs325 per share. The UB group has revised the open offer price, which is what retail shareholders would get, for Shaw Wallace to Rs260 from Rs250. The premium to Jumbo group is for a no-competition clause for the next 5 years. The UB group says it plans to consolidate all its spirits businesses under a single entity to be called UB spirits. This entity would be the second largest spirits player in the world behind Diageo, in volume terms.
  
• Matrix Laboratories announced plans to acquire up to 60 per cent stake in Chinese drug company Mchem. The two companies had formed an alliance a few months back. According to Matrix, Mchem reported profits of $35 million for the year 2003 and this deal would enable the combine to emerge as an integrated pharma player in the Asian region.
  
• Centurion Bank completed its GDR issue which raised close to Rs300 crore. The GDR’s were issued at a discount to the domestic stock price and will be listed on the Luxemburg stock exchange. After the issue the foreign holding in the bank has gone above 70 per cent.Subex Systems, which is into telecom revenue maximization software products, announced a deal with a telecom company in Africa. The company is one of the market leaders in this segment.

Outlook: Though this correction was expected, the duration and extent of the correction is making matters really painful for investors. As mentioned last week, the markets would remain weak for the rest of the month as there are no fresh triggers and FII’s would wait for the fourth quarter results to come in. The futures and option expiry next week could make the market very volatile.

*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.

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