A Look at Recent Trends in Indian Markets: Fully Priced and Time to Hedge?

by: Wisdomsmith

Weekly Trading Update

  • Bull Charge:

Equity markets globally had a good week, continuing from where they left off last week. Markets have risen for the third straight week in September. In fact, other than a minor downward close on Thursday, September 16th, Indian markets have risen every single trading day in September. Friday’s value is a new 31 month high.

For the local markets, operators have been giving a positive spin to every new piece of data. Last week they had some genuinely good bit of new, an IIP release showing 13.8% growth for July 2010.

This week, there were couple of news items, to which market reacted positively. On Tuesday, the government released whole price inflation (WPI) data, on a new series. This had a base of 2000-01. This showed a WPI inflation of 8.5% for August. This was less the market expectation of above 9% inflation. While 8.5% inflation is by no means a reasonable number, markets reacted positively to this, ending positive.

Then on Thursday, the central bank RBI raised key policy rates more than market expectations. Markets again reacted positively, and interest rate sensitive stocks like real estate and banks rose. While there were positive statements in the RBI release, the market seems to have ignored the caveats.

  • Global Markets Up Too:

It is not only the Indian markets which are reacting positively. A positive September mood seems to be a global phenomenon. US indices are up, and so are major Asian indices. In most cases, the gains for September are now a large portion of annual gains.

Global markets are taking the view that the so called ‘double-dip’ recession is unlikely.

  • Metals and Banks Gain:

We are almost repeating what we wrote last week here. Metals and banks were once again the top two gainers. IT had a better week, after having been left behind in the earlier weeks.

Real estate stocks also did well, even though the sector index somehow does not capture this. As can be seen in the table, the sector is a laggard over 12 months. Operators are now latching on the sector, propounding the theory that demand is reviving.

  • Commodities Subdued:

Global commodities once again seemed to have had a good week, with most base metals posting strong gains. Even oil moved up to some extent.

As noted in earlier weeks, commodities are benefitting from the positive global sentiment. If main global economies do well, commodity demand is likely to revive.

Headline Market Data

Stock Trends

  • Sensex Stocks:

Real estate stock DLF topped the headline index this week. This seems to signify increasing market interest in the real estate sector. Investors are focussing on real estate stocks, these are looking reasonably priced having underperformed the market in the last 12 months.

Sun Pharma gained after favourable ruling in its court case with Isreali pharma company Taro (TAROF.PK). On Thursday, its tender offer for Taro Pharmaceutical Industries shares ended, raising hopes that the company may finally end its three-year toil to acquire the Israeli company.

Sun Pharma had entered into an agreement to buy Taro a few years ago. But Taro terminated the merger agreement in May 2008, saying Sun Pharma’s original offer was too low. The original agreement included an option compelling promoters, Levitts, to sell their 12% stake that controls 41% voting rights to Sun Pharma once the tender offer closed. The stake will help Sun Pharma increase its voting right in the Israeli generics drugmaker to 65%. Taro current traded at around $12 per share in the US OTC market. So Sun is getting a good deal now.

Reliance Industries was another big gainer for the week. Reliance gained on reports that it may get a 25% hike in the price for its gas. It asked the oil ministry for permission to sell gas for prices in the range $4.75-5.25 per million British thermal units. It said it had buyers willing to pay this price. The government had approved a price of $4.25 per mbtu till 2014.

  • Metals Gain:

The BSE Metals index was the biggest sectoral gainer for the week. Uttam Galwa, a company owned 34% by global steel leader UK-based Arcelor Mittal (NYSE:MT), gained 16.5%. The reason appeared to a change in strategy by the UK company. Facing delays in land acquisition and protests by tribals in India for its proposed units, ArcelorMittal said on Thursday last, that it revised its strategy and will now focus on smaller plants with annual production capacities of 1.5-3 million tonnes. The market expects greater involvement with Uttam Galwa.

Ispat Industries, a company owned by two brothers of LN Mittal, the global steel leader, gained partly in rumours that Arcelor Mittal may take a stake. These rumours keep happening periodically. The India-based Ispat Industries has been struggling financially for a long time. Finally, it emerged that it was selling a 10% stake UK-based trading major Stemcor for Rs 250 crore. Given that its market cap on Friday close was Rs 2903 crore, Ispat Industries is not getting any premium on the transaction.

Bhushan Steel jumped almost 13%, we don’t think there was a specific newsflow here. The stock has been depressed for some time, and could have gained from general positive sentiment towards the metals sector. The other gainers like Tata Steel and Monnet were driven by simply investors bidding them up on better overall prospects for metals.

Market Micro Data

  • BSE Sensex – Top 10 Gainers:

  • Metals – Top 10 Gainers:

  • BSE Bankex – Top 10 Gainers:

  • BSE 500 Gainers:

  • Banks March On:

Banks are the best story of this bull market, and they continued to gain during the week. Last week we wrote how the BSE Banking index was at an all time high, bettering its previous high on January 2008 by at least 5%. It gained 4% more this week, extending its gains to almost 10% over its previous peak.

Banks shrug off a hike in policy rates by the regulator RBI on Thursday, which effected a greater than expected rise in policy rates. In fact, interest rate sensitive stocks like banks and realty rose on Thursday. The reason, it appears, is that markets took the view that this may be the last bit of aggressive rate hike by the regulator. You may have noticed our title to this week’s note "Markets focussing only on the positives." Clearly, markets are not in the mood to entertain negative thoughts at this point.

This week the private sector banks did better than PSE banks. The Hinduja group promoted IndusInd Bank was the top gainer. It raised $252 million through a qualified institutional placement at Rs234.55 per share. The bank now quotes at 5.4x FY10 book value, and about 4.5x FY11 book. These are valuations comparable to sector leader HDFC Bank (NYSE:HDB). Investors may find little further value, and are advised to book profit.

HDFC Bank itself gained during the week, pushing its own valuations to 5.1x FY11 expected book value. Bank stocks have entered uncharted valuation zones now, and could be ripe for correction. HDFC Bank, quoting at an all time high, has now exceeded its Jan 08 price by 36%.

Axis Bank gained more than HDFC Bank. On a relative basis, it is significantly cheap, quoting at about 3x FY11 expected book. Axis is now 29% over its Jan’08 highs.

ICICI Bank (NYSE:IBN) is one of the few Indian banks not quoting at an all time high. At Friday’s price, it was still about 24% less than its current all time high price, set in Jan’08.

Private banks may have gained this week from news suggesting that the central bank RBI may free deposit rates. This could help leading private banks compete better with public banks in mobilising deposits.

Looking Ahead

  • 20,000 for Sensex and 6K for Nifty?:

The two headline indices can reach important landmarks in the new week. Just a 2% rise can take Sensex to beyond 20,000 and Nifty to 6000. All time highs are still 6.7% away, so not quite in touching distance.

Given the sharp inflow of liquidity this may well happen. FII flows picked up during the last week. In first four trading days of last week, FIIs invested $1.67bn, an amount about 3x what they did during the entire last week. This is a large amount to come in during a week.

  • Fully Priced:

On a fundamental basis, the markets are reasonably valued at this point. Ideally leading indices should take a halt at this point. However, given that India’s growth is looking strong, liquidity is simply pouring in. So, markets can exceed what one may call fair valuation at this stage.

Our Sensex target for April 2011 was 19200, and this has since been exceeded. We would ideally expect a retracement to around 18,000 levels, but again, too much liquidity could keep markets high.

We would advise investors to hedge their portfolios, or book profits at this point. While there are several reasonably valued mid-cap companies, any fresh purchases have to be made with a 2-year horizon at this stage.

  • IPO Rush:

A good way to know when markets are fully valued is the number of IPOs lining up. The IPO rush has now officially started. Issuers are rushing to grab the opportunity while it lasts. Some 5 IPOs were open last week, and alteast 4 IPOs are opening next week.

Of the IPOs which opened last week, all of them look headed for reasonable subscription, though of the lot, Eros International Media (OTC:EOITF) appears the best placed. Both are open till 21 September, the next Tuesday, and investors may consider subscribing here. The holding company of Eros, Eros International Plc, is listed on London-based stock exchange AIM. Shares in Eros International drop nearly 4 percent on AIM after the Indian arm set a price band of Rs 158-175 for its IPO. It appears the price set here was below the expectations of the London market.

Next week, it appears that at least 4 new IPOs are opening. These are Ramky Infra, Orient Green, Electrosteel Steel and Cantabil Retail. Infrastructure companies have not done well on the stock markets, and have underperformed in this market rally. This may affect sentiment on Ramky. Orient Green is the first IPO of a renewable power generator. While it may evoke investor interest, the business model is untested, and issue does not quite appear cheap.

  • News Flow:

It appears global market movements and news flow will be the major influence on local prices in the next week. The US markets see monthly housing data come out on Tuesday. Durable orders data will come on Friday. Both have the potential of influencing markets. The weekly jobless claims data comes on Thursday as usual.

The Federal Open Market Committee (FMOC) meeting is scheduled next Tuesday. This is equivalent to the RBI meeting which raised interest rates last Thursday. The FOMC is expected to keep current historically-low interest rates unchanged from levels set in December 2008. Global investors will keenly watch what the FOMC says about further policy action. In recent days, the US has talked about taking more action to spur its own economy.

Disclosure: No positions