Weekly Technical Analysis

Ok. Finally the Verdict is Out. Markets have really been strong and we have definitely broken the downtrend. Look for good weeks ahead.

Positives

• All indicators maintaining their uptrend.
• MACD Cross above 0.

Negatives

• None in particular. Still extremely Overbought.

Analysis

After a few weeks of "Do Not trade" and "have patience" words, we mentioned in our previous newsletter that last week(week ending 27th May) would be a decisive week. And it really was. We also clearly stated to go LONG if we broke the 6500 level. Which was decisively broken last week. Since we have left the 50 DMA way back and have never looked at it again, there is every reason to believe that we are now in a Bullish zone. The downtrend and downward waves are over and it is now time to create the upward waves.

Outlook

Ok, we are again at the most difficult question. What would happen in the coming week. Since we broke past all resistances and key levels and moving averages, we are in a good strong bullish zone. But at the same time, we are Extremely overbought. As much as we would want to go long, we are tempted to go Short too. Short, Not because the market might go down. But because a correction is long due. Again, if we look back. Indian markets have a tendency to stretch the overbought-ness to few weeks. So what do we do. Since a Correction is due, it is advised to go Long only with strict stop-losses around the strong support levels. We would strongly suggest you trade only in the second half of the week, by which time we expect some correction to have happened or to start.

The Flavour Of Oil

Valuations of oil stocks are likely to greatly improve in the long run. And then oil will truly smell sweet.

Is it the right time to invest in oil stocks? Let us examine a few facts. India, as a market, has a humungous appetite for oil. However, only 30 per cent of its requirement of nearly 110 million metric tonnes per annum is met by domestic producers. The downstream companies that refine and market crude, thus, have to import a major portion of their requirements. This is hugely expensive, as global crude prices have been ruling at $50-plus (Rs 2,200-plus) for some months now. They then process this crude and sell it at government-determined low prices. Who makes up the deficit? No one. It's a straight hit to their bottom lines. Will the government raise prices? Probably. But it is unlikely to raise them enough to make good the entire loss anytime soon.

Sounds bad? Yes. Does it still make sense to invest in these companies? Yes. Here's why: the current situation cannot go on for ever. Something has got to give. Either global prices will come down (which appears unlikely at present), or the government will have to raise prices. Once the oil companies (particularly the refining and marketing companies) are allowed to sell their products-especially kerosene and LPG-at market-determined prices (or at rates close to them), their bottom lines are likely to improve substantially. The profits of exploration and production major ONGC (Oil and Natural Gas Corporation) will shoot up too as it will not have to share a part of the implied subsidy burden with the refining and marketing companies. Then again, the stocks of most of these companies (with the possible exception of ONGC) are hugely undervalued, and any change in the scenario is likely to improve their valuations considerably. Here's a more detailed look at the oil sector from an investment perspective.

Exploration And Production

All over the world, increases in crude prices bring joy to oil exploration and production companies. The scenario is different in India, though. India's biggest exploration and production company, ONGC-also India's most valuable company, with a market cap of over Rs 1,25,000 crore-has not really been able to benefit from the global surge in crude prices due to domestic political compulsions. Bowing to the demands of the refining companies and unable to take the burden on itself, the Union government in 2004 decided that ONGC and GAIL (India) Ltd. would have to share the subsidy burden on LPG and kerosene with the refining and marketing companies. Today, that translates to an outgo equal to one-third of the total subsidy component on LPG and kerosene for ONGC. This is adversely affecting its bottom line. For instance, in 2004-05, ONGC had to fork out Rs 3,114 crore to IOC, HPCL and BPCL as subsidies for LPG and kerosene.

Is ONGC still a good bet? Sanjiv Prasad, analyst at Kotak Securities, reckons it is probably a better bet than the refining companies. On a turnover of Rs 35,450.75 crore (for the first nine months of 2004-05), it raked in profits of Rs 9,075.94 crore. This is after shelling out the subsidy to the refining companies. Moreover, increased investments in infrastructure, new gas discoveries, improving import facilities and continuing high prices are seen as positives for the company. Analysts expect the deregulation of the gas sector to add Rs 1,500 crore to ONGC's bottom line every year. Further, it now has permission to set up around 1,100 retail outlets (it set up its first outlet in Mangalore recently), which is likely to add to its overall growth in the near future. So, if you have stocks of ONGC, just hold on to them for dear life.

Refining And Marketing

The subsidy burden takes its highest toll on the public sector integrated downstream companies (which refine and market petroleum products) such as IOC (Indian Oil Corp.), BPCL (Bharat Petroleum Corp.) and HPCL (Hindustan Petroleum Corp.). These companies buy their crude either from ONGC (which bears one-third of the subsidy burden) or from global markets at prevailing international prices. However, they are unable to sell their products at market prices and, thus, have to bear huge losses. The total under-recoveries borne by the PSUs have gone up from Rs 9,370 crore in 2003-04 to Rs 19,900 crore in 2004-05. According to the Ministry of Petroleum, this is expected to touch Rs 37,000 crore this fiscal, while the oil companies put the figure at Rs 50,000 crore. And while they do benefit from higher refining margins of $12.15 (Rs 534.60) per barrel, they lose out because they are unable to sell their final products-kerosene, diesel and LPG-at market prices, thus, directly affecting their bottom lines.

So, what should your approach as an investor be? Should you buy, sell, or hold these stocks? Opinions differ, but analysts of all hues agree that over the long term, oil stocks are a veritable gold mine. Says Gul Tekchandani, Chief Investment Officer, Sun F&C: "Valuations are extremely attractive because going forward, there will be substantial returns for equity holders. The subsidy issue, too, should get sorted out soon." Tekchandani's logic: these stocks have hit rock-bottom prices, and you're unlikely to get them at such low values later. The outlook for the future is positive as well: India is an energy-deficient country, and demand for oil will certainly increase. Besides, all these companies have strong fundamentals.

Others are cautiously optimistic. Ramdeo Agarwal, Managing Director, Motilal Oswal Securities, says: "There is no significant upside in the short run unless the government revises oil prices," but admits in the same breath that it could well be a good time for the retail investor to get his feet wet because these stocks have already bottomed out.

So, if you don't have stocks of oil refining and marketing companies, the time to get in is now. And if you already own them, the right strategy will be to hold on to them, despite the negative sentiments currently surrounding the sector. Among the refiners, analysts are most bullish on IOC, simply because it owns and operates the country's largest crude oil and product pipeline network of nearly 80,000 km. Marketing companies using this network have to pay IOC access and transit fees, thus, giving it another revenue stream.

Then, there's Reliance. India's biggest private sector refiner, with 27 million tonnes per annum of refining capacity at Jamnagar, does not have to bear the burden of subsidies. Says Jigar Shah, Head of Research at K.R. Choksey Shares and Securities: "The infighting within the Ambani family has pushed its valuation down. This makes it even more attractive."

Whichever way you look at it, the energy sector in India looks good for the future. And if you've managed to stand your ground on slippery turf, the flavour of oil will be one to savour, and remember

Business Today

Traditional items propel export growth

The 24.13 per cent export growth in dollar terms during 2004-05 owed itself largely to the robust performance by five traditional products - agriculture and allied products, ores and minerals, gems and jewellery, chemicals and related products and engineering goods - which together constitute a preponderant 65 per cent of the aggregate exports of the country.

Latest foreign trade data collated by the Directorate General of Commercial Intelligence & Statistics and compiled by the Economic Division of the Commerce Department for the fiscal year 2004-05 show that the country's exports touched $79,247.05 million, against $63,842.97 million in 2003-04, reflecting a growth of 24.13 per cent.

Agriculture and allied exports with a weight of 7.61 per cent in total exports posted a reasonably high growth of 11.60 per cent during 2004-05 at $6,033.94 million, against $5,406.70 million in 2003-04, while ores and minerals exports (weight 5.29 per cent) logged a growth of 77.03 per cent at $4,193.44 million, against $2,368.73 million in the previous year.

While exports of gems and jewellery (17.29 per cent) notched up a growth of 29.62 per cent at $13,705.44 million in 2004-05, against $10,573.38 million, exports of chemicals and related products registered a growth of 27.28 per cent at $12,677.21 million, against $9,960.12 million in 2003-04.

Engineering goods exports (18.41 per cent) acquitted themselves well by posting a growth of 38.71 per cent at $14,587.37 million, against $10,516.45 million in 2003-04. Textile exports with a dwindling share of 15.16 per cent in overall exports put up a tepid show by notching up a negative growth of 1.53 per cent at $12,017.46 million, against $12,2204.71 million in the previous year. The dip in exports assumes significance in the light of the fact that the quota regime in global trade in textiles and clothing ended in the final quarter of the last fiscal but this did not get reflected in any marked rise in export receipts.

Destination-wise, India's exports continued its growth story with Asia and Oceania as this region absorbed 47.41 per cent of its total exports and recorded a rate of growth of 27 per cent at $37,573.37 million in 2004-05, against $29,621.10 million in the previous year. Exports to West Europe (23.80 per cent) grew by 19.72 per cent at $18,859.10 million in 2004-05, against $15,752.10 million in the previous year, while exports to the Americas (20.42 per cent) logged a growth of 20.50 per cent at $16,181.76 million during 2004-05, against $13,428.35 million in 2003-04.

Though East Europe, Africa and Latin America account for a meagre share of India's exports, these regions displayed bullish trends by registering a reasonably higher export growth with India during 2004-05, reflecting the diversified nature of India's export efforts.

Among the top 15 countries for exports, Singapore recorded the highest growth of 79 per cent at $3,795.51 million during 2004-05, against $2,124,84 million in 2003-04, followed by China of 55 per cent at $4,586.28 million ($2,955.10 million) and the United Arab Emirates of 38 per cent at $7,098.14 million ($5,125.61 million).

On the import front, the 37 per cent growth in imports during 2004-05 saw the import bill touching $1,07,066.11 million, against $78,149.62 million during 2003-04. Bulk imports with a weight of 39.09 in aggregate imports grew by a hefty 43.03 per cent during 2004-05 at $41,851.00 million, against $29,259.46 million in 2003-04. Petroleum, crude and lubricants which account for 27.87 per cent of total import grew by a whopping 45.09 per cent at $29,844.10 million in 2004-05, against $20,569.60 million in the previous year, partly fuelled by a flare-up in world crude prices which cruised to a level of $50 per barrel.

Machinery imports with a weight of 10 per cent in total imports grew by a moderate 15.11 per cent at $10,709.87 million during 2004-05, against $9,303.90 million during 2003-04.

Equally with a share of 10.11 per cent in aggregate imports, import of gold and silver registered a rate of 57.87 per cent at $10,824.38 million during 2004-05, against $6,856.42 million in the previous year, marking a recrudescence of interest in bullion as a safe haven for investment by the public.

Destination-wise, India's imports from Asia and Oceania, which accounts for a share of 35.40 per cent in total imports, grew by close to 40 per cent at $37,899.26 million, against $27,151.41 million in the previous year. Import from West Europe (22.60 per cent) was up by 29.45 per cent at $24,194.92 million, against $18,690.45 million in 2003-04. Imports from the Americas (8.36 per cent) grew by a robust 29.18 per cent at $8,947.03 million, against $6,926.20 million in 2003-04.

Among the top 15 countries for imports, the highest growth last fiscal was logged by UAE of 122 per cent at $4,581.96 million ($2,059.85 million), followed by Switzerland of 76 per cent at $5,817.92 million ($3,312.75 million) and China of 66 per cent at $6,746.66 million ($4,053.23 million).