Weekly Close: lacklustre week with Action in Midcaps

Tag of War continued between Bulls and bears which brought in tough fight this week. As market began with gains but the witnessed selling pressure and Thai Govt, dictat was given as excuse for the fall. Valuations were stretched...and it was used as opportunity to book profit by smart investors. But major impact was seen on FIIs. This week saw foreign fund flowing out of the system. But value buying was seen after two days of fall. Fundamentally Indian markets have always remained an attractive destination and they will continue to attractive in future too...but at certain point market seems to be overvalued and corrects. Anyways such rally should be used to get in some value stocks with sound fundamentals.

The Sensex ended down by 1% for the week. Gains supported by ONGC up 6.45%, Ranbaxy up 2.65%, Tata steel up 4.04%, Hero honda up 3.35%. While Bhel down 7.46%, NTPC down 6.36%, SBI down 4.35%, HDFC bank down 4.83%, Satyam down 3.42%, HLL down 4.98% led to the fall. Cement stocks were also laggard for the week.

US finally signed the much talked about nuclear bill. That's was the progress in itself. This will open the doors for Nuclear Power technology. There are some hurdles to the same as internally, there are some provisions which challenge sovereignty of thought on the Nuclear plans. There seems to be a provision which contains to the effect that the fuel will be cut off if India performs a Nuclear test even once. Power stock some interest. But the Leftists have raised the issue. This is an extract from a note.. "The Hyde U.S.-India Peaceful Atomic Energy Cooperation Act takes away that option by making it explicit that not only nuclear cooperation will be terminated if India conducts tests but the country will be required to return all equipment and materials that it may have received under the deal." How the Government deals with this needs to be seen however given the increased benefits of a deal such as this, we believe it should be passed.

There was turmoil in Asia this week after the Thai Government brought in capital controls on the Baht. Thailand put in place capital controls which made it mandatory for all foreigners bringing money into the country to place 30 per cent of it on deposit at the central bank, without interest. To take their money out again within a year overseas investors would have to pay a 10 per cent penalty. Investors reacted with their feet and Thai Market collapsed by 15%. This also brought back memories of 1997 Asian crises. The sell off prompted a change of rules back to square one, which came after crisis talks between the central bank, the government and the stock exchange. These controls have been removed for investment in equities. The rule remains in place for bonds and commercial paper. Thailand has a military Government after the recent coup. Certainly it does not understand economic policy. This bungle had the Thai Baht crashing but then market bounced back as the currency was down and also the markets with the brave Investors wanted to take advantage in the equities.

News which was missed out in the Thai melee was that the Japanese central bank has kept interest rates unchanged at 0.25%. The Bank of Japan said in its monthly report that the economy is still growing, though sluggish wage growth is holding back consumer spending. The economy is expected grow two per cent in the coming fiscal year but downgraded its estimate for growth in the current year. The country's GDP is expected to grow by only 1.9 per cent in the current year, down from a forecast of 2.1 per cent made earlier this year. Still both years would trail last fiscal year's 2.4 per cent increase.

The government said that it was confident in achieving its targets of fiscal and revenue deficit for the year. While the fiscal deficit target for 2006-07 stands at 3.8% of the GDP, the revenue deficit target has been set at 2.1% of the GDP. We believe that it is certainly going to be a tough task. The expenditure is front loaded and a lot of it has been incurred. Revenues from tax collections has been encouraging but there is a possibility of slippage largely on the back of higher expenditure given the oil and fertiliser subsidies. We however believe that in a growing economy, even higher deficits can be sustained. Capital formation helped by higher deficit is acceptable. However more on this later.

Reliance surged ahead of its bid for Hutch stake. The battle for Hutch seems to be getting more interesting. Vodafone which has a 10% stake in the holding company of Bharti has been indicated to have bid for over $12 bn and Reliance Communication apparently has bid for $ 15 bn. The market has so far reacted positively for Reliance Communications bid. But an aggressive bidding is always negative for the bidder and hence thats our pick for downtrades. A high valuation for Hutch implies even higher for Bharti and that is what makes it an upstock.

The capital goods sector stocks were under pressure. The Mega power projects were won by Tata Power and Lanco. Apparently these two bid at Rs 2.3 per unit and 1.2 per unit of Power. This will be possible only if the capital cost for the project is extremely low. There were worries that Lanco Bid was a flippant one but really its in line with Reliance Energy which bid around Rs.1.3 for the same and another bid which was slightly higher. Incidently NTPC also bid but was high at over Rs 2 per unit. Tata Power and Lanco intend to source the power equipment from Korean and Chinese suppliers. This hit Bhel and Siemens badly. Also hits NTPCs low cost power producer image. Valuations of these companies have been hitting the roof on the back of large order books. But if the mega power project orders go to some other players, its certainly a hit to valuations.

Technically 13600 is important level. If market sustains above this levels index could see new high while 13200 is major support. If this level is breached then index could see 12600. We would recommend to play extremely safe in such choppy markets.

Performance for the day: DTP continued to deliver well in choppy markets. However, today there calls with hit our the target and some missed. Long call on Maruti and Sadbhave hit stop loss. India Cement, Deepak Fertiliser and Adlabs booked good profits