Party continues on Dalal Street

Tue, 5 Jan Closing

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Even five days after the start of a new year, the celebrations seem to continue in the Indian stock markets. With today's gains, the markets are nearly at their highest in 21 months. In fact, nothing seems to be giving away as the rally is broad-based, across sectors. The biggest gainers for today were stocks from the metals and realty sectors.

The BSE Sensex and NSE Nifty closed with gains of around 125 points (0.7%) and 45 points (0.9%) respectively. Mid and small cap stocks followed suit. The BSE Midcap and BSE Smallcap indices closed higher by around 1.2% and 0.9% respectively. On the broader BSE, two stocks gained today for every stock that lost out.

Metal stocks led today’s gains in the broader markets. Key gainers from the sector included Nalco, Hindalco, and JSW Steel. While commodity prices looking promising over the next few months, so do the medium term prospect of some of these companies. Specifically with respect to the two aluminium companies - Nalco and Hindalco - speculation of rise in Chinese alumina prices seems to have excited investors in these stocks. However, while this rise in alumina prices is owing to a supply shortage, experts are not expecting the same to continue for long. Anyways, these companies are also taking hikes in their final product prices, which will prove beneficial for their financials.

IT stocks were amongst the weak performers today. The BSE IT index managed a mere 0.5% gains. Marginal gains were seen in Wipro, Infosys, and TCS. After a brilliant run in 2009, wherein the IT index was amongst the top sectoral performers, the new year has started on a weak note for the same. One reason could be the fair valuations at which most IT stocks are trading at currently. Then, the rupee’s appreciation against the US dollar owing to large foreign inflows into India is also casting some pressure on the sector’s medium term outlook.

Remember, an appreciating rupee affects IT companies’ margins. This is because every dollar earned can then be converted into lesser number of rupees while the rupee costs for these firms do not change much. With economists expecting the rupee to strengthen further, profits of IT companies can take some hit during the coming quarters. But that doesn’t change our long term outlook on the sector, which is positive. We believe that the value proposition for IT offshoring remains strong and this will benefit the right kind of companies from the sector over the next 5 to 10 years.

Auto stocks closed mixed today. While gains were seen in M&M and Bajaj Auto, selling pressure was seen in Tata Motors and Maruti. This again seems a case of profit booking after these stocks surged sharply during the previous year. Maruti for instance multiplied almost four times during 2009. The company, India’s largest passenger car maker, is said to be planning a capacity expansion to take on its rivals that are introducing new models to challenge the former’s dominance.

The company will be using a part of its large Rs 50 bn of cash reserves to fund such an expansion. It is also looking at selling record 1 m units of its vehicles during FY10, as compared to around 0.8 m units it sold in FY09. While the company’s long-term prospects remain bright, we can’t say the same of the stock’s current valuations.