Weekly Close: Market jingle 'Don't worry be happy'

It was a bulls week. Globally markets remained firm for the week except Wednesday when US market dipped on weak housing data. Sentiments were positive across the globe. Sensex gained 2% for the week while Nifty gained 2.7%. Infosys results disappointed as they they met expectations of not being upto mark. Rupee played spoilsport and was the reason for reduced guidance in rupee terms. The exporters Got some government sops but really that did not matter much for the stocks. Bajaj numbers also disappointed and pressure continues to be there in a high interest rate environment. The optimism of the management about the new bike is what kept that stock up. Infrastructure companies had a gala time and then real estate companies joined in as well.

Inflation came in marginally higher at 4.27% Vs 4.13% for week ended June 30th. It remains controlled but not comforting in terms of the direction yet again. However the numbers because of the base effect will remain benign till September end and that helped the banks with no negatives. Some banks lowered their lending rates reflecting the increased liquidity. RBI tried to keep the rupee from appreciating but really the flows remain strong and its only adding to the liquidity. July 31st is the RBI meeting and thats unlikely to losen strings if this surge continues.

Mutual funds saw 25 per cent growth in the first six months this year, with assets now worth over Rs 4 trillion as against Rs 3,21,trillion in December last year. Fund houses collectively added over Rs 79,000 crore to their kitty within first six months of 2007. Reliance MF was the largest fund house with AUMs of close to Rs 60,000 crore. ICICI Prudential ranked second with Rs 43,000 crore. This may seem impressive and shows that Indians are jumping to put their funds into the markets. Important to note that atleast 50% of the AUMS are debt funds. Secondly the jump of 25% in assets under management also includes the appreciation of roughly 10%. Having said this.. we continue to believe that the markets will find greater participation. Near term though the issue of PAN cards will slow the addition of new entrants into the system.

Shipyard business seems set to take off. Bharti Shipyard bagged a $43.4 million order recently. L&T is set to invest between Rs 1,500 cr and Rs 2,000 cr in a new greenfield shipbuilding venture. Presently it has a shipbuilding yard at Hazira in Gujarat. The company recently bagged a Rs 440 cr order from Rotterdam-based Zadeko Ship Management CV to build four ships for special purpose cargo movement. ABG and Bharati are also expanding their capacity to meet the growing demand. Interesting to note that only about 4 weeks days are due for subsidy to get over which began in the mid-1990s. Indian companies want this to be extended by the finance ministry. Under this Scheme shipbuilders get a hefty 30% extra on every ship they build of a certain size or for the export market or domestic market. This scheme has already been extended twice. The current five-year subsidy, introduced on Independence Day in 2002, is set to expire on 14 August. In 2002, when the subsidy was last extended, Indian yards had orders worth Rs1,500 crore. Today, Indian yards have about 220 ships on order, at an estimated worth of Rs 15,000 crore. Because of the attractive subsidy, shipbuilders, both existing and new ones, have lined up investments of about Rs10,000-15,000 crore to upgrade and modernize existing yards and set up new facilities to boost capacity. It is expected that the subsidy will get reduced to 20% in the next plan and 10% in the plan after that. Wonder whether this has been discounted in the valuations of ABG shipyard and Bharti. The stocks continue to perform.

Gillette cut prices of its twin blade razor under brand Vector Plus. The price of razor has been slashed from Rs.49 to Rs.29 and a set of two cartridges from Rs.35 to Rs.20. Gillette is the market leader in premium shaving products. The market for shaving products in the country was around Rs.600 crore. Of this, 80 per cent would be conventional blades and only 20 per cent would be twin blades and premium shaving systems like Gillette's Mach 3. Gillette was acquired by P&G whose basic strategy has been cut prices to gain market share. This would be a smart move to increase volumes. We believe that the Vector will do better that the Presto! Presto is a use and throw twin blade. With vector cartridge priced below that, certainly that would be an aspirational brand. Competition would be really under pressure now. The key would be to spruce up its distribution. Valuations appear expensive.. but given the increasing marketsize, valuations are unlikely to slip. We like this company but it has been an under performer. However its time is nearing we believe. What we are not comfortable though is that P&G is now the owner and their treatment of the minority shareholders does not have a good track record. The Indian P&G hosted the home wash business till as much time as was being grown. When it was time to bring in profits, it was transferred to a 100% subsidiary. Keep watch on Gillette.

Zodiac is another brand company. The company derives over a third of its revenues from Branded sales in domestic markets. Interesting to note that the organised sector retailing of menswear is seeing strong growth and Zodiac provides a play on that. Manufacturing capacity in Dubai and deigner offices in 3 out of the 5 in the world fashion capitals are his selling point. Clearly the products are good and there is an aspirational level. Valuations make this attractive as well. Rupee strength is what seems to be worrying investors.. but given the segment where Zodiac operates, we think it should be a non issue. Do read our research note on this one.

Technically Speaking: Sensex is in a new range and continues in Mmentum. The bias is upwards as mentioned last week. Last week we mentioned that Sensex support in case of pull back was 14730. This week that is raised to 13870. Negatives would continue if this level is broken on the downside. 15090 is another support and thats the Gap support created on the way up by the Sensex. The fact that the gains of close to 200 points made on Friday was with advance decline volume of 2 advancing stocks for every 3 declining.

Fundamentally Speaking: There is little reason on internal fundamentals to justify the current rally. This time too its liquidity driven. More cash inflows into the Indian Markets continue to drive them up. Global risks seemed to have waned and thats the reason for the same. However on valuation parameters we would believe that the upsides carry a risk. Merril has given its reasons and anticipates a 10% drop in Emerging markets. We believe that its no point trying to predict the top though. Enjoy while it lasts. The results season however could negatively surprise and if this comes from an Infrastructure company, that could be really bad.