Markets started the week on a strong note after the sharp upsurge during the previous week which had taken the indices to never before levels. The Sensex touched the 7200-mark for the first time ever. However, early gains could not be held on Monday as profit booking emerged in heavyweights.

All-round profit booking and a sell off in metal stocks saw the markets declining substantially on Tuesday. The Sensex saw a 100 point fall for the first time after a couple of months. Reliance Industries also saw some correction.

The markets bounced back on Wednesday, helped by ONGC and Reliance. The gains in these heavyweights gave a lot of strength to the main indices and helped the markets to recover part of the previous day's losses.

The recovery continued into Thursday as well, as volumes hit an all time high on settlement day. ONGC continued its rally and was supported by VSNL, HDFC and HDFC Bank. Sensex managed to touch 7200 for the second time but could not close above the mark.

The last day of the week saw a sharp decline in ONGC which held the Nifty down in red throughout the day. However, gains in stocks like SBI helped the Sensex to close above 7200 for the first time ever. Nifty closed the week well above the 2200 mark.

Mid-caps had a difficult period for most of the week. When the markets fell on Tuesday, the decline in mid-caps was much higher than the frontline stocks. Even when the frontline stocks recovered, smaller stocks remained lacklustre. However, on Friday the CNX Mid-cap 200 index finally managed to post significant gains and outperformed the larger indices.

US markets, economy and oil

US markets closed almost unchanged after seeing much volatility during the eventful week. During the early part of the week, traders took a cautious approach ahead of the US Fed open market committee meeting which was held on Thursday.

The US Fed raised the short term interest rates by 25 basis points as expected, maintaining its policy of steady and measured hikes. The inflation outlook was stated to be stable.

The US GDP growth for the first quarter ended March '05 was higher than most analyst's had expected. The growth was fuelled by the continuing robustness in construction activity as real estate prices remained stable despite warnings of a possible bubble.

Robust economic growth has led most analysts to believe that the US Fed will continue to raise short term interest rates for the next one year at least. Most of them expect interest rates to be well above 4 per cent by next year from the current 3.25 per cent.

US consumers continue to brush aside high fuel prices as the consumer confidence index hit a 3-year high. Manufacturing activity index also showed a smart jump helped by new orders.

Oil prices hit a new all time high of $60.95 to a barrel on the NYMEX on Monday. The markets were worried about the impact on oil supplies after a new hard line government came to power in Iran.

The next three days saw a dramatic fall in oil prices as traders and speculators booked profits. The weekly US inventory data showed an increase in stocks of crude and refined products.

Friday saw the crude futures bouncing back 4 per cent on some aggressive statements from OPEC. After suspending talks to hike output by another 500,000 barrels, the oil cartel gave an indicative ideal US crude price of $53 per barrel. The target price is higher than the $40 to $50 range indicated earlier and led to the surge in futures prices.

Domestic economic and regulatory action

Inflation for the week ended 18 June declined to 4.1 per cent from 4.33 per cent reported for the week before. The decline was attributed to a fall in prices of textile products even as primary articles and food prices went up.

The sharp upsurge in the Adlabs Films stock price in the two days preceding the acquisition announcement by Anil Ambani group shows that our markets still have a long way to go as far as governance standards and regulations are concerned. In just two days, the stock gained close to 30 per cent and was locked in the 20 per cent upper circuit on the second day. Definitely, some market players had advance knowledge of the development and had bought the stock aggressively.

The run up in the stock prices of Reliance Capital and Reliance Energy also raise similar doubts. The stocks saw aggressive buying before the announcement of preferential issue to promoters and institutions. These two stocks outperformed the Reliance Industries stock by a large margin on the first trading day after the announcement of the Ambani settlement.

The Reliance Capital stock had run up by 40 per cent before the news of huge institutional interest in the preferential issue became public. Again, there was enough market operators who knew about it well in advance.

It is indeed a disappointment when this involves companies controlled by Anil Ambani, who has been trying to portray himself as the champion of corporate governance and shareholder protection. It is not very difficult to prevent the leak of such sensitive information as usually only a few people in the top management are involved.

To understand how far Indian markets have to go as compared to US markets, look at the announcement by Boeing during the week that it has appointed a new CEO. The stock gained over 7 per cent 'after' the announcement was made. Till then, the markets had no clue about the timing of the announcement, though speculation about a new CEO has been going on for a while.

The inaction by the market regulator is all the more surprising. The regulator and the stock exchanges completely ignored the periodic rumours about an Ambani settlement and volatility in Reliance group stocks for the last six months. Instead of investigating the allegations regarding corporate governance and unusual stock price movements, SEBI seems to be content to give the whole Reliance episode a quite burial.

Industry update

• The more than 2 year long up trend in steel prices have come to an end in the domestic markets as well, at least in the short term. All domestic companies have reduced spot prices of steel from 01 July by Rs500 to Rs2,500. Lower prices may not affect companies like Tata Steel, which sell most of their output under long term contracts. European and American producers had cut production and product prices last month itself.

  The decline in steel prices was triggered by the marginal slowdown in Chinese construction activity which led to a build up of inventories with manufacturers. While the construction activity may pick up in the coming years leading to the 2008 Beijing Olympics, this may not push up Chinese imports as their domestic capacities are also rising. Therefore, international steel prices may remain soft in the short to medium term.

  This could upset Indian steel companies, which have lined up massive investment plans to expand capacity over the next few years. Including the POSCO plant, total industry capacity would almost double in the next seven or eight years, if all the proposed plants do come up. While domestic demand can be expected to see reasonable growth, a slow down in export demand could have serious implications for many companies. Most of these companies would now be praying that India become the next China at least in infrastructure investment.

Corporate moves

• The BK Birla group has unveiled investment plans totalling Rs1,200 crore for group companies. Century Textiles will undertake investments of Rs625 crore while Century Enka will invest Rs160 crore. The cement manufacturer Kesoram Industries will invest Rs425 crore. Except the Aditya Birla group, most other Birla companies had not undertaken any major expansion plans for a long time.

  The various Birla factions are also believed to be in the process of separating the cross-holdings of investment company Pilani Investments in various companies belonging to different Birla factions. These cross-holdings have been the cause of many disputes between various Birla families. The 25 per cent stake in Pilani held by MP Birla group will be controlled by R S Lodha, who was named by Priyamvada Birla as the custodian in her will. This has caused much heartburn among the Birla clan and the family is fighting a legal battle with Lodha.

  There has been intense speculation in industry circles and media over the last few years that the ownership of most of the BK Birla companies will go to his grandson Kumarmangalam Birla, chairman of Aditya Birla group. This has finally been confirmed by BK Birla himself. Except for smaller companies like Jayshree Tea which will go to BK Birla's daughters, all the other companies will come under the control of Kumarmangalam Birla.

• While announcing the acquisition of Adlabs, the Anil Ambani group stated that its strategy is to provide funds and 'management bandwidth' to promising small companies. If this indeed is the strategy, Reliance Capital would become more like a holding company which takes large ownership stakes in smaller companies. The group has already appointed a senior professional to oversee mergers and acquisitions.

  A closer look at the business plans of Adlabs and some of the other moves made by the group over the last one week point more towards a strategy to ride the telecom-entertainment convergence wave. Reliance Infocomm has ambitious plans in the broadband space. Though broadband in the country is mostly limited to data traffic now, entertainment content will account for an increasingly higher portion in the future. Part of this content can come from Adlabs.

  Adlabs has aggressive plans in film production, both in India and abroad. Its first English language movie will come out shortly and the company has already firmed up joint venture productions with European producers. Adlabs also has plans to acquire rights to Indian and western movie titles and target the home entertainment market.

  The only missing link in this strategy is a broad platform to deliver content into homes. Despite broadband, television will continue to be the major medium for content delivery for a long time. To plug this gap, the Anil Ambani group applied for a DTH license during the week. In the not too distant future consumers can expect television, telephony and broadband internet - all under a single subscription from Reliance Infocomm.

• JSW Steel, formed by the merger of Jisco and Jindal Vijayanagar, is planning a major diversification into aluminium. The JSW group has signed a MoU with the government of Andhra Pradesh to set up an aluminium refinery and smelter. The refinery will have a capacity of 1.5-million tonnes per annum and the smelter will have a capacity of 0.25-million tonnes. The project would see a total investment of Rs9,000 crore over the next seven years.
  

*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.

Other articles by Rex Mathew

List of general reports on markets

List of general reports on finance