ITC, L&T make it five in a row

Tue, 15 Jun Closing

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Markets managed to hold on to their gains during the closing hours of trade and thus close the day yet again in the positive. While the BSE Sensex closed higher by around 75 points, NSE Nifty managed to log in a gain of around 25 points. BSE Midcap and BSE Small cap indices also flourished, ending higher by 0.4% and 0.8% respectively. The breadth was also positive with nearly 3 stocks gaining for every one that declined on the Sensex today.

Most Asian indices also closed in the green today whereas Europe too is displaying a good deal of strength currently. The Indian currency was trading at Rs 46.5 to the dollar at the time of writing

Today is the fifth day in a row when the markets have closed in the positive territory. And it does mark a significant turnaround from where we were just a couple of weeks back. Not only have global sentiments improved as investors have chosen to put the European debt crisis behind them, a couple of India specific factors have also helped matters. Foremost being the record collections from the telecom licence and broadband spectrum auctions and the arrival of monsoons as per schedule. However, we are not convinced that this rally has some very strong legs. For one, the developed world debt problem still lingers and secondly, inflation in India refuses to die down, raising the specter of hardening of interest rates, which in turn could choke growth to some extent. However, if there are good long term stories available out there at attractive valuations, they should indeed be bought into from a long term perspective.

Tyre stocks traded mixed today. While stocks like Apollo Tyres ended in the red, companies such as JK Tyres and Goodyear closed the day in the positive. If a news item in a leading daily is anything to go by, the Indian tyre industry is in for some very good times in the next few years. As per the daily, domestic tyre manufacturers are expected to pump in a total of Rs 120 bn into the country to expand capacity, mainly of radial tyres. Strong growth and low levels of radialisation in India are attributed as the key reasons behind the planned investments. It should be noted that at around 10%, India has amongst the lowest radialisation rate and hence, as road infrastructure develops and improves rapidly, demand for radial tyres is likely to shoot up. This thus presents a very good opportunity for players having the capability to manufacture radial tyres. However, rising rubber prices and adverse movement of the rupee do pose some serious threat to the industry.

HUL, the FMCG behemoth continued to ride the buyback story and closed higher by around 2% today. With today’s gains, the company has now edger higher by around 20% from its 52 week lows. Although the size of the buyback is small as compared to the shares outstanding, it couldn’t have come at a better time for the company as investors’ faith was slowly losing its sheen. Besides, the company generates tremendous cash from operations, helped in no small measure by its strong working capital management. The buyback thus provides some outlet for the company to put its cash to good use as keeping it on the balance sheet would have meant dilution of overall returns to some extent. Thus, the buyback sends a strong message that it may not be able to log in strong growth profit growth as in the past but it surely knows how to reward its shareholders.