Signs of Stability

While inflation remains a concern, markets are expected to be less volatile this week

The week gone by saw the markets losing ground on each of the five trading days. The first two days saw the BSE Sensex lose 18 and 39 points. Last Wednesday, the markets lost 97 points and on Thursday, which was the last day for the April series in the futures market, the Sensex lost 156 points. Last Friday, which was the opening day of the new series and the last day of the week was no better with a similar loss of 156 points. Cumulatively the market lost 466.29 points or 2.38 per cent to close the week at 19,135.96 points. The NSE Nifty lost 135.2 points or 2.30 per cent last week. The other indices like the BSE100, BSE200 and BSE500 lost 2.14 per cent, 2.15 per cent and 2.05 per cent. The BSE Midcap fared better than the broader markets and lost much less at 1.95 per cent, while the BSE Smallcap lost 1.84 per cent. The BSE Bankex lost a significant 3.46 per cent. BSE Realty was a big loser with a weekly loss of 201.17 points or 8.45 per cent. Heavyweight stocks in the Realty index like DLF and HDIL lost in double digits while the two companies who are in the news for the 2G scam, DB Realty lost 8.05 per cent and Unitech lost 10.52 per cent. Clearly the mood has turned negative at the end of the week.


Praying: An Indian stock dealer reacts during intraday trade in
Mumbai. PICS/AFP

Sellers
Foreign Institutional Investors (FIIs) have turned sellers and have sold equities worth Rs 1,272 crore in the first four days last week, while on a provisional basis Friday saw net sales of Rs 690 crore. These numbers are turning out to be significant.The result season is on and some interesting facts are emerging. In manufacturing industries there is a definite cost push or cost pressure, which is being witnessed. Raw material prices or commodity prices have risen significantly and manufacturers are unable to get the full benefit of the same from their purchasers. Beside raw materials, salaries and wages and interest costs have risen significantly. Fuel costs and therefore transportation have all risen significantly. All of these put together have resulted in sales growth because values of materials have increased and also volume growth, but the margins have come down.

Margins
In many cases though margins have come down, volume growth has ensured that the net profit is higher than the previous year, but in some cases even the net profit is lower than the previous year. An example of the latter is Maruti Suzuki where sales have grown in the quarter ending March 11 to Rs 10,092.18 crore from Rs 8,424.55 crore in March 2010, a growth of 19.79 per cent. Profits in the same period were almost flat at Rs 659.86 crore in March 11 against Rs 656.55u00a0 crore. Net margins in March 11 were 6.54 per cent against 7.79 per cent in March 10. The drop is a significant 125 basis points. If instead of looking at quarterly numbers one looks at annual numbers the figures are even more alarming. Revenues have risen on annual basis from Rs 29,623 crore in March 10 to Rs 37,040 crore, a growth of 25 per cent. Net profit in March 2010 was Rs 2,497.62 crore which has fallen to Rs 2,288.64 crore. Net margin has reduced significantly from 8.43 per cent to 6.18 per cent, a drop of 225 basis points or that margins this year have dropped a staggering 26 per cent. The case of Maruti is just an example and there are many more such examples, which would be available.

Parameters
The stock market in valuations looks at growth, margins and scalability of business amongst many other parameters. If in the case of a company there is a substantial drop in margins and it appears that the pricing power of the company is not there, such a company loses the price earnings (PE) multiple that the company enjoys.



Issues
The Initial Public Offering (IPO) market was very active last week and we saw as many as three issues opening and closing during the week. Besides these three, we saw one other issue closing on April 25, Monday and yet another opening on April 29, Friday. The level of subscription and the category of investors have been very different. Future Ventures India Limited issued shares in a price band of Rs 10-11 and the issue size was Rs 750 crore. The issue was overall subscribed 1.52 times with the help of friendly High Net worth Individuals (HNIs), who subscribed the issue 7.81 times.

Support
The Qualified Institutional bidders (QIB) and retail portion remained unsubscribed with 0.26 per cent and 0.61 per cent being subscribed respectively. Innoventive Industries raised Rs 220 crore in a price band of Rs 117-120 and was subscribed 1.24 times. The issue received support from QIBs to the extent of 85 per cent, while the retail with 1.48 times and HNIs with 1.94 times made up the balance. The third issue was from Servalaksmi Paper Limited which raised Rs 60 crore in a price band of Rs 27-29. The issue was subscribed 1.47 times with the QIB portion subscribed a mere 0.34 per cent. The Retail portion was subscribed 1.90 times and HNI portion 4.21 times. Paramount Printpackaging Limited would be raising Rs 46u00a0 crore in a price band of Rs 32-35. The issue was overall subscribed 3.92 times. What is surprising is the response in this issue from the retail who subscribed their portion 9.31 times, while QIBs have subscribed a mere 0.33 times and HNIs have put in 3.28 times their portion.

Profit
Vaswani Industries is tapping the capital markets with its issue for 1 crore shares in a price band of Rs 45-49. The issue will close on May 3, Tuesday. The company has made a profit of Rs 3.68u00a0 crore in the year ended March 2010 and Rs 2.69u00a0 crore in the seven months ended October 2010. If one were to annualise these numbers we are talking of a net profit of Rs 4.61 crore for the year ended March 2011. The market cap of this company post IPO would be Rs 105.71 crore at the lower end and Rs 115.10u00a0 crore at the upper end of the price band and the price earnings ratio would be between 22.93 and 24.96 times. These kind of valuations are not available to even companies Tata Steel, JSW Steel or for that matter SAIL. A small cap company being over ambitious is the best way to describe this company.

Unique
Sanghvi Forging and Engineering Limited is tapping the capital markets with its issue to raise Rs 36.90 crore in a price band of Rs 80-85. The company is in the business and has a capacity of 3600 tonnes, which is being increased by an additional 15,000 tonnes per annum. The project envisages setting up a forging hammer capable of handling single piece forging of upto 40 metric tonnes. This would make this company unique in India. The previous performance of the company has been that of a small-scale company with sales of Rs 28.89 crore in the year ended March 2010 and Rs 29.32u00a0 crore in the nine months ended December 2010. The net profit for the year ended March 2010 was Rs 2.52 crore and for the nine months ended December 2011 was Rs 2.95 crore. The market cap of the company at the upper end of the price band would be Rs 107.88 crore and based on the nine months annualised numbers is being offered at a price earnings multiple of 27.45 times. I believe the issue needs to be given a skip.

Policy
The week ahead would see the credit policy from the Reserve Bank of India (RBI), in which the Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) are likely to be raised, as inflation is not showing any signs of abating. This could have a negative effect on the market and we could see some more selling from foreign institutions. The markets would otherwise be less volatile than what we have seen so far.

Support
The BSE Sensex has support at 18,981 points, then at 18,868 points, then at 18,640 points and finally at 18,480 points. The BSE Sensex has resistance at 19,323 points, then at 19,550 points, then at 19,664 points and finally at 19,737 points. The 200-day moving average (DMA) would be at 18,810 points and should act as a strong support on any downward move. The NSE Nifty has support at 5,702 points, then at 5,668 points, then at 5,609 points and finally at 5,561 points. It has resistance at 5,801 points, then at 5,868 points, then at 5,898 points and finally at 5,944 points. The 200-day moving average is at 5,650 and would act as a strong support. A more sedate week is what would be the best way to describe the week ahead.

Arun Kejriwal is founder of the Mumbai-based advisory firm Kejriwal Research & Investment Services Pvt Ltd. Readers are invited to read more about these and other issues on his website https://ak57.in
Disclaimer: No financial information whatsoever published anywhere in this newspaper should be construed as an offer to buy or sell securities, or as advice to do so in any way whatsoever. All matter published here isu00a0 for educational and information purposes only and under no circumstances should be used for actual trading or making investment decisions. Readers must consult a qualified financial advisor prior to making any actual investment or trading decisions, based on information published here. Any reader taking decisions based on any information published here does so entirely at his or her risk.

BSE Sensex
Support
18,981 ptsu00a0u00a0u00a0u00a0u00a0u00a0u00a0
18,868 ptsu00a0u00a0u00a0u00a0u00a0u00a0u00a0
18,640 ptsu00a0u00a0u00a0u00a0u00a0u00a0u00a0
18,480 ptsu00a0u00a0u00a0

Resistance
19,323 pts
19,550 pts
19,664 ptsu00a0u00a0u00a0
19,737 ptsu00a0u00a0u00a0u00a0