By the time you read this article, the market may be nearing the end of its two-month rally
At last, after 15 weeks of going up and down, the market crossed the high of 15th April. Two weeks ago, I wondered whether a trend change was imminent, though I wasn’t sure. I had said, the Sensex, “has traded in a very tight range over the last three weeks and is now about to head higher.” I had also suggested that “a new short-term global rally has started and the market is headed higher. There is a likelihood that the short-term high would now be around 18,300 on the Sensex. If it crosses that, we are in for a major extended rally driven by global liquidity that would defy all logic.”
The global rally was, however, a halting one and a mixed affair. The US market has barely budged while the Chinese and the Japanese markets have continued to decline. But once it was clear (around Thursday, 22nd July) that the US market was decisively headed higher, all global markets made a fresh upmove. We had said last week that, after a brief rally that is currently under way, global markets would swoon. Hence, to participate in the current upmove, buy the declines, not the momentum. And also run for the exit fast because a big decline may happen any moment. We still maintain this view. This strategy of buying the declines would have paid off very well last fortnight when the market went up and down in a tight range for days together.
Now that the Sensex has broken out of its tight range to higher levels, do we have a major rally on our hands? Not quite. The strategy remains the same—buy the dips because the endpoint of the current rally is still around 18,300 on the Sensex. You don’t want to chase this market as it rises further. But since the entire market is now watching this figure of 18,300, it may peak out before it reaches there. From a low of 15,960 it hit on 25th May, the Sensex has rallied by 2,200 points already. Each rally, in the last one year, has been of 2,000 points. We have gone beyond that; and it is hard to see how we can head higher without a longish and substantial correction.
In short, while we continue with the cautiously bullish stance, we are aware that a downside break can come any day. In fact, the chance of a correction, sometime in early August, is quite high. This could be substantial (about 1,500 points); so be prepared to run for the exit. This is why we have become neutral in our medium-term outlook. And when do we know that we are wrong? If the Sensex blasts past 18,300 easily. The next target would then be 19,000.
Since the second innings of the UPA regime — while the Sensex has gained 26% — RIL shares, which have the highest weight in the index, have fallen 15%
Over the past 14 months, the BSE Sensex and almost all growth stocks in the index, except a few, have shown large gains. Notable among the losers are Bharti Airtel Ltd and Reliance Communications Ltd (RCom), both of which have suffered because of a changed business model. Surprisingly, among the losers is Reliance Industries Ltd (RIL), the country's largest private sector company which earns tens of thousands of crores in cash flows. Despite good performance during the period in terms of net profit and sales, RIL shares have fallen 15% from 18 May 2009 to 30 July 2010.
On 18 May 2009 when the United Progressive Alliance (UPA) government assumed power for the second time, the Sensex was at 14,284.21 points while RIL was at Rs1,183.78 (adjusted for bonus). Since then till the week ended 30 July 2010, the Sensex has jumped 25% to 17,868.3 points, while RIL's share price actually fell 15% to Rs1,009.65. The share price movement of RIL, with a weightage of 12.93% in the Sensex, is completely in contrast with other stocks in the index. Even the share price of ACC Ltd, which has the lowest weightage of 0.61% in the Sensex, has moved up 15% to Rs831.45 from Rs720.85, since the UPA's second innings commenced.
During the same period, Anil Dhirubhai Ambani Group (ADAG) companies, Reliance Infrastructure Ltd (RInfra) and RCom, however, witnessed mixed movements. While RInfra's share price rose 10% to Rs1,108.6, RCom's share tumbled 38% to Rs178.45.
Two out of the top three gainers among the Sensex stocks, during 18 May 2009 to 30 July 2010, are not IT companies but automobile makers. During the period, Tata Motors Ltd's share jumped 179% to Rs846.35, making it the highest gainer among Sensex stocks. The second-highest gainer is also from the Tata stable. Tata Consultancy Services Ltd's (TCS) shares rose 126% to Rs841.1, during the same period. The third-highest gainer was Mahindra & Mahindra Ltd (M&M), which rose 108% to Rs661.5.
While telecom stocks RCom and Bharti Airtel Ltd fell 38% and 39% respectively, during the past 14 months, there are specific reasons for this movement. The past 12 months have not been too good for the telecom sector and the falling share price of both Bharti Airtel and RCom reflects the same. (See: http://www.moneylife.in/article/8/5441.html).
However, despite everything going in its favour, RIL shares have not found their rhythm yet. During the past year, RIL has come out a winner in almost all fronts, be it legal matters or takeovers. In May 2010, the Ambani brothers, Mukesh and Anil, signed a truce agreement ending a bitter public and legal battle which had broken out despite both brothers arriving at a family settlement to divide the Reliance empire in 2005, based on a formula worked out by mother Kokilaben.
As part of the latest truce, the two brothers decided to scrap a non-compete agreement between their respective groups, a move that would give each side flexibility to utilise resources more efficiently and enter businesses hitherto inaccessible to each of their respective group companies.
On 30 June 2010, RIL filed the revised gas sales master agreement (GSMA), which will replace the four-year-old GSMA between RIL and RNRL for supply of a minimum 28 million cubic metres per day of natural gas at $2.34 per million British thermal unit (mmBtu).
For FY10, RIL's total revenues crossed the Rs2 lakh crore mark; it made a fourth discovery in the Cambay basin in Gujarat; the company announced a joint venture with Atlas Energy and also invested some money in Deccan 360. RIL has also announced that it will enter the power sector by making investments in coal-based, hydro, nuclear (when it is opened for the private sector) and solar power projects.
Earlier in June, Mukesh Ambani, who had to quit the telecom sector for his younger brother, returned to telecom in style. He re-entered the sector by buying 95% stake in Infotel Broadband Services Pvt Ltd for Rs4,800 crore. RIL-Infotel is the only company with a pan-India broadband license.
In short, there has been all positive news coming out from RIL. Its share price movement, however, continues to remain weak. There may be a few reasons for this anomaly, one associated with its KG basin production and second, lack of new buyers in the stock market.
"With the KG D-6 gas production remaining constant at 60 million metric cubic meters per day (mmcmd) for the next three quarters and a marginal decline expected in petrochemical margins, we do not expect any kind of positive surprise in the earnings of RIL at least in FY2011. Furthermore, it is quite difficult to assign a value to the company's investment initiatives, though we positively view the acquisition of two shale gas assets in the USA, the foray into the telecom sector and the proposed entry into the power sector," said Sharekhan Ltd in a research report.
Echoing the same views, Ambit Capital Pvt Ltd said, "We are revising our FY11E and FY12E EPS downwards by 10% and 8% respectively to account for conservative ramp-up in KG-D6 gas production. We, however, maintain our 'BUY' recommendation on the stock with a target price of Rs1,250 (from Rs1,270 earlier), given improving refining fundamentals and the company's attractive E&P portfolio."
During the past 14 months, the average trading volumes of RIL shares have come down to 1.39 crore shares in July 2010, from 2.59 crore shares in June 2009. Does this mean that there are fewer buyers in the stock market for RIL, the country's largest conglomerate? It could be so. For almost everyone, from fund managers to individual investors, RIL is a 'must' stock in their portfolio. While all the active players in the stock market have a 'saturated' position in the RIL stock, unless there are new buyers, there would not be much upside for the company's shares.
The market started the last trading day of the week on a soft note as support from the world markets was lacking. It traded range-bound in the negative zone for the entire morning session. The Sensex made a feeble attempt to touch the 18,000 mark and the Nifty managed to scale an intraday high of 5,413 in the post-noon session. But the markets were led down by disappointing opening by the influential European markets and the negative close of the Asian markets. Finally, the Sensex ended 123 points down (0.7%) at 17,868 and the Nifty settled 41 points down (0.7%) at 5,367.
The overall market breadth was negative. The Sensex had 22 declining stocks against eight advances while the Nifty ended with 35 declines over 15 advances. Bucking the trend, the broader indices ended with marginal gains. The BSE Mid-cap index gained 0.3% and the BSE Small-cap index rose 0.2%.
The top gainers on the Sensex were Mahindra & Mahindra (M&M) (up 2.7%), State Bank of India (SBI), HDFC Bank (up 1.2% each) and Tata Steel (up 0.6%). The top losers included Bharti Airtel (down 3.1%), Hero Honda (down 3%), DLF (down 2.6%), ICICI Bank (down 2.3%) and Tata Motors (down 2.2%).
All sectoral indices on the BSE ended in the negative terrain today. The top losers were realty (down 1.4%), technology (down 1.2%), capital goods, IT (down 1.1% each) and power (down 0.9%).
The Insurance Regulatory and Development Authority (IRDA) today expressed hope that the row over withdrawal of the cashless treatment facility at select hospitals by public sector insurance companies will be sorted out shortly.
Representatives of four public sector companies and private hospitals are holding a meeting in Delhi to sort out the problems following withdrawal of the cashless treatment facility by PSU insurers.
New India Assurance, United India Insurance, National Insurance and Oriental Insurance had stopped the cashless service from 1st July because of alleged over-billing by some private hospitals.
Markets in Asia, with the exception of the KLSE Composite, ended in the red today. While strong earning reports have kept the momentum going, economic concerns from the world's largest economy curbed risk-taking appetite. Japan's core consumer price index fell 1% from a year earlier in June, compared with a 1.2% drop in May, while industrial production and employment data added to the worries.
The Shanghai Composite was down 0.6%; Hang Seng was down 0.3%; Jakarta Composite was down 0.9%; Nikkei 225 was down 1.6%; Straits Times was down 0.3%; Seoul Composite was down 0.6% and Taiwan Weighted was down 0.5%. On the other side, the KLSE Composite gained 0.1%.
The National Stock Exchange (NSE) is in talks with the Tokyo Stock Exchange for a possible partnership to cross-list key products on each other's platforms.
Earlier, on 28th July, the NSE and the London Stock Exchange (LSE) entered into an agreement to evaluate the option of cross-listing their key indices on each other's platforms. Under the agreement, the two exchanges will explore the feasibility of an agreement under which the FTSE Group may license the FTSE 100 Index to the NSE and the Indian bourse may license its benchmark Nifty-50 to the LSE for trading purposes.
US markets ended in negative terrain for yet another day on Thursday on concerns over the economy and lower earnings expectations from technology and consumer companies. The Dow fell 30.7 points (0.3%) to 10,467.16. The S&P 500 fell 4.6 points (0.4%) 1,101.54. The Nasdaq fell 12.8 points (0.5%) to 2,251.69.
Indian Oil Corporation Ltd (IOC) chairman BM Bansal, while speaking to reporters today, said that global fuel prices have not seen much movement; hence there is no need to revise petrol prices. The government freed petrol prices last month and State-run oil marketing companies had decided to revise prices of the fuel once a month.
Foreign institutional investors were net buyers of Rs578 crore in the equities segment on Thursday. Domestic institutional investors were net sellers of Rs920 crore on the same day.
State-run NTPC (down 0.4%) has commissioned a 490-MW unit at its Dadri thermal power plant in Uttar Pradesh for the upcoming Commonwealth Games. The first 490-MW unit at the same power project was commissioned earlier by BHEL and has been running satisfactorily, BHEL said in a separate press statement.
Power generated from the Dadri Stage-II would be supplied to Delhi (90%) and Uttar Pradesh (10%). With the commissioning of this project, the total installed capacity of NTPC has reached 32,194MW.
Hindustan Construction Company (HCC) (up 3.8%), which posted a 55% jump in its profit after tax (PAT) in the quarter ended 30th June today said it soon plans to file its draft red herring prospectus (DRHP) with the Securities and Exchange Board of India (SEBI), for raising up to Rs2,000 crore through an initial public offering (IPO) to part-finance its ambitious Lavasa township project.
The company posted a 55% growth in its PAT at Rs28.31 crore in the quarter ended 30th June as against Rs18.19 crore in the year-ago period. Its turnover rose 5% at Rs1,008.22 crore in Q1 FY11 as against Rs964.09 crore in the corresponding quarter of the last fiscal.