Weekly close: Again ready for a bounceback

It was the week of big correction as Sensex showed a free fall in the first two days with a loss of almost 1000 points but soon it bounced back and showed a smart recovery of almost 600 points in the last three days of the week. The sessions were really volatility over the week with Sensex ending down by 1.4% from the previous weekly close. Markets saw severe selling pressure and there are many notes giving excuses for the same starting with the surprise CRR hike, advance tax withdrawals, sudden FII selling pressure and then to add to that the weak IIP numbers which means some slowdown so on so forth that created panic among investors. But this free fall was used by investors as an opportunity to get in.

The Reserve Bank of India surprised the markets on Friday last week by raising the cash reserve ratio (CRR) by 50 basis points to 5.5 percent to be implemented in two stages starting December 23. Reasons cited were high WPI and CPI inflation. The intention is to tighten liquidity conditions, to moderate the frenetic pace of bank lending and also to manage expectations of higher inflation. The hike will soak up Rs 13,500 crore from the financial system. This seems to be against the long term goal of RBI to reduce CRR to 3 percent. WPI seems to be quite manageable at 5 - 5.5% but CPI has been around 7%. Clearly, the banks' cost of funds will go up, forcing them to tweak upward the sub-PLR loan rates. Banks immediately felt the pressure of this hike and tumbled as the trading started on Monday.

The Indo US Nuke deal was finally passed in the US. This deal is important to India for reasons stated earlier. There is a large capacity to come up and its enriched Uranium which is not available. The political hurdles still exist and there will be debates on whether Indian sovereignty has been compromised. However this is a big thing happening in the power sector. The expectations have begun to creep in that the economy is slowing.

The Federal Reserve noted a "substantial cooling" in the housing market but also kept its emphasis on inflation fighting in the statement accompanying its decision to leave interest rates unchanged. The Fed has not softened its stance towards interest rates and thats confusing. The dollar was down post the Fed comments. Markets are seeing the possibility of a rate cut by March. Interestingly there was positive data for the US dollar. The U.S. trade deficit narrowed sharply in October. We view that a weak dollar as the negative for the US which has so far had a strong dollar policy. Given this uncertainty, Central Governments will be diversifying their forex holdings on the sly so as not to deliver a dollar shock. Its in the interest of everyone.

Century Textiles informed that voluntary retirement scheme (VRS) for the Mumbai textile mill, of a total staff strength of 6600, about 6300 workers have opted for voluntary retirement. As per reports on an average, in the new VRS scheme, the workers were given Rs 9 lakh to Rs 10 lakh which works to around Rs 600 crore. The Worli mill had been losing money on the back of high costs such as electricity at Rs 4.25 paise per unit, water at Rs 45 per 1000 litres, octroi at 4% and Rs 400 as wages per worker per day. This year the company inducted Kumar Mangalam Birla, on the board. BK Birla is now 80+. Certainly, we feel that Kumarmangalam is taking active interest. The company has 30 acres of land in the heart of the city of which roughly of 10 acres, was taken on lease from Bombay Dyeing on a 999-year lease and can be extended for another 999 years. This land is worth over Rs 100 per share. The land is likely to be used for development. A Marwari would not pay Rs 350 crore for nothing. On an EV per tonne basis at current levels $ 167 seems to be fair for Century. Better Operational performance will be the driver ahead. The stock fell by almost 17% in the initial carnage but recovered handsomely by more than 16% in last three days.

ESPN Star Sports has won the ICC telecast rights for an eight-year period starting 2007. Industry estimates that ESPN Star's bid was at $1.1 billion followed by Nimbus at $900 million, Zee ($850 million) and Tensports ($825 millon). This news created negative sentiments initially however the positive about this bid is that Zee is not going overboard to get the programmes. It would have been a big risk. Risk needs to be taken for returns but it needs to be managed well. The stock tumbled initially by 12% reacting to the news but again pulled back by more than 10%. Zee Telefilms is going for restructuring and it will demerge itself into three entities namely Zee Entertainment, Zee News Limited, and Wire & Wireless India Ltd.(WWIL). Zee Telefilms will be delisted from today itself and the Zee entertainment will be relisted on 18th December while the othe two entities will be listed in January. This restructuring will bring clarity in the business.

The mid caps have started joining the party and more is possible next week. However the worry is from the global markets where the US cues are not too encouraging. Indian Markets made a sharp recovery as was the fall and this good news should bring in more momentum. However it has brought forth the risks and we believe that the large caps will be seen more cautiously than ever before. We believe that the valuations are high and thats the bane for now. However in the near term the advance tax figures will bring in some gains.