Friday 15 February 2008

Weekly Close: Resurgence on a Valentine !

Strong come back after a slum as investors witnessed a YOYO market at the start of the week but a jolly day on Valentine brought in comforts. Market pared off the gains during first two days, then, rebounded to end up by 3.7% for the week. The US mayhem continues to hover over globe. US central Bank has reduced the growth forecast and that signals the seriousness of the problem. Easy escape from this seems difficult.

Indian market rallied and recovered in last two days. There was some relief from global front however this a pre budget rally. Expectations are building up as the budget is nearing. Every one seems to be excepting tax benefit and excise benefit. But, whether this will be met or not needs to be seen. We will update you on Budget expectations soon.

Markets this week: Sensex up 3.7%, Nifty up 3.4%, Mid cap up 0.5%, Small caps down 3%. Metal index up 6.7%, Banking index up 7.2%, Oil and gas index up 6%. Gains were led by BHEL (10%), Suzlon (7%), Unitech (18%), reliance cap (13%), Tata steel and SAIL (9%) HDFC (8%), ICICI (10%), RIL (+6.5%), HPCL (12.5%) and BPCL (8%), J P Associates (10%)

Inflation for the week ended Feb 02 stood at 4.07% v/s expectation of 4.16%. Inflation was low so far but it was a base effect. Now as the base effect is over we will see the actual number. Govt. increased the fuel prices?this will directly impact inflation which will push the inflation upwards henceforth. The possibility of rate cut also seems bleak in the high inflation scenario.

Oil marketing companies rallied as Govt. hiked the petrol and diesel prices by Rs.2 and Rs.1 respectively. This hike has been long awaited by the oil marketing companies. However this might not help much where crude is trading at $90 per barrel. But the cement stocks got a hit with this fuel price hike.

ATF may get declared goods status.. The Civil aviation ministry has requested the Finance minister to declare ATF under the declared goods status in the budget. Andhra Pradesh government has already reduced the sales tax on ATF from 33% to 4%. Civil aviation officials have also suggested that an intermediate sales tax rate of 10% may be considered till it is reduced to 4% by including jet fuel in the list of declared goods. The revenue loss of states due to lower sales tax is likely to get compensated by the additional volume of fuel consumed by airlines. ATF price in the country include an excise duty of 8%, Custom duty of 10%, sales tax averaging 23% across the country, throughput charges levied by the airport operators and marketing margins of oil companies. The Domestic Airline to benefit from this as ATF accounts for 40% of operating cost of an airline. Also the AP govt's move will result in more Aircraft arrivals at Hyderabad which will bring in more revenue. This reduction in sales tax could see uniform pricing across the nation. The airlines sector continues to face tough competition for now.

The data from World Steel Dynamics Steel Bench marker TM suggests steel prices are continuously on an uptrend across board. In the past one and half months, Hot Rolled Coil (HRC) prices have increased by $125/t in US, by $84/t in Europe and by $24/t in China. During, the same period Cold Rolled Coil (CRC) prices increased by $127/t in US, by $74/t in Europe and by $43/t in China. The major hit was taken by the Pipes manufacturing companies and this was seen in the last quarter the pipe companies have taken a big hit on the margins. We expect this to continue for coming quarters too but some relief could be seen as the companies would increase the prices of their products which they couldn?t do in the last quarter. We like Maharashtra Seamless and ISMT in the seamless segment. Do read our Quarterly analysis on these companies.

We had a note on Cranes Software which is into software product marketing and its strategy has been to acquire product based companies and cross sell them across. The company derives 80% of revenues from international markets while the rest 20% of revenues from domestic which is largely as a reseller. The products of the company are in a niche area of Statistical softwares / Technical softwares used by Scientists / Chemists working on environment sciences, life sciences, behavioral sciences, medical research and engineering. Competition is quite tough with some large global players. We believe that the slowing global economy will impact off take for this company. New product development on the engineering side will be slower than what it is now. Valuations do seem to be a bit expensive.. but do read our view in the note.

Sugar stocks had sweet week as the Govt. has allowed PSU banks to lend Sugar companies for reimbursing the sugarcane arrears. This is a temporary relief for the sugar companies. Before commencement of the crushing season, it was estimated a bumper cane crop will lead to sugar oversupply. But, now the estimates are lowered due to low sugarcane yield per hectare and delay in crushing. The sugar buffer carried from last year is significant and this is negative for sugar industry. There are also reports that Brazil will see lower sugar production because of severe winter. Ethanol blending of 10% from October 2008 will boost the sugar industry as cane will be diverted for ethanol. Overall scenario remains bleak for the sugar companies. Although politics plays a major role here. The variables which need to be watched in future will be SAP (State Advisory price), SMP (Statutory Minimum Price) and sugar prices globally. Better get more clarity here before entering the stocks. Renuka Sugars is better off amongst the all, as its Maharashtra based and is more integrated player. Keep watching this space to know more.

Technically Speaking: Sensex opened gap down but rallied over 500 point from days low to close up by 349 points up. Turnover churned stood at Rs 6372 cr as Sensex made a high if 18143 and low of 17445. Advances outpaced Declines in the ratio of 2.5:1. As we mentioned in the MID MARKET Sensex is nearing our target of 18400. We might see some profit booking at that level. Support now at 18000 and 17850.