Weekly Close: Decoupling week.. or was it ?

This was a positive week for the market. No political issues and markets ignored global cues from the US mid week indicating that we were set to decouple Sensex almost challenged to make new highs. Reliance and SBI stood as the pillars holding out. Mid cap and small caps were the stars for the week and quite a few them are covered by us in our research. Bush came in support US market saying that he would stand by the consumer. Markets cheered that but this we believe would only delaying the pain. Indian Markets had a smart run with 8 consecutive sessions of gains with dark clouds of the internal political crises delayed by about a month. However given the silence, the markets seem to be assuming that the worst is over. We believe that this may be the Lull before the storm.

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There are many who believe that a recession may be on cards in the US. In fact, by the time we write this the US unemployment data seems to be pointing to a worsening situation. There was an interesting article from Gavekal which gives reasons to the otherwise mentioned in our note "Economy : Taking stock today." The argument is that the US consumer is extremely dependable and companies have lot of cash and also making profits. The firing of people seems less likely and hence lesser chance of a recession.

Market performance this week was positive: Sensex closed up 1.7% up; Nifty 1% up; Mid caps 2.5% up; Small caps 4.5% up; FMCG & Health care 3.8% up.

Auto sector is heavily banking on festive season. But this is what TVS CEO Mr Srinivasan had to say "We have been reducing our stocks in the market place specifically on Star because of the new launch planned in September. To that extent we have been reducing the stock in the market place that was rolled out on 30th of August. This quarter would be again flat but we expect the market to pick up from the festive season once the credit availability is also there in the market place. We expect that from October onwards sales will start picking up and have 7-8% growth in the next half." Interestingly Honda Motors will increase capacity to 12 lac 2 wheelers and also intends to launch 3-4 models including a 100 cc bike. Bajaj is in the news the Maharashtra Government is worried about its plant closure in Akurdi. Bajaj will be paying the 2700 odd workers in any case. Another statement by Mr Ravi Kant, CEO of Tata Motors says that they do not expect a pick up in demand this season because of higher interest rates. Maruti has extended its price discounts to ensure higher off take. Really, all in all, the news are not encouraging. Lower interest rates are what could be the catalyst. With inflation lower, may be we could hope for that.

This week Eveready reported that it would issue 45 lac warrants for Rs 58. Interesting to note that in Nov 2005 the company had issued 67 lac warrants to the Promoters with an execution price of Rs 95. The Management had paid up 10% of that amount upfront. Also interesting to note that around 9 lac warrants were converted at Rs 95. With the Zinc rallying, profitability was hit and the stock crashed to 45 levels leaving losses on the table for the Promoters and useless warrants in hand. This set of warrants will lower the price of the acquisition and makes more sense. The other set of warrants will not be exercised till the stock hits 85.50 (9.5 is already paid up). We need to know With Zinc at $2850 per tonne, certainly near term would be a buoyant. The warrants at 58 indicate the management?s bullishness. So probably the worst is behind us. The average six month price is Rs 55 so that?'s the reason for the pricing at Rs 58. They would have to pay 10% of this upfront to get the warrants. We are positive about the

In our discussion with Navneet we learnt more about its E-learning initiative. There are some exciting changes happening in the company. The product has been launched in Gujarat already with some initial successes. The Management is certainly more aggressive than it used to be. That's a big change. We like this one. However some negative for Educomp is that there are other players making an entry as well. Edurite (edurite.com) is a company which provides the educational content and that really would be creating some competition for Educomp. Valuations of Educomp seem to have gone through the roof and here are some reason for it to cool off and may be rub off at bit on Navneet. Await a research note on this.

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Conflicting articles continue in papers about the subsidy for the shipbuilders. This issue is in debate between the Finance Ministry and the Shipping Ministry. There possibility that the subsidy may not be extended is less but there is a good chance that the subsidy limit may be reduced. Ships Manufactured in India carry a 30% government subsidy. The Industry has been pleading for the subsidy to be extended. In our discussion with the Management of ABG Shipyard, we are informed that all orders signed till August 14th is eligible for the subsidy. However this topic will take at least a couple of months to be cleared. The Parliament has to pass this. We think this will take its time unless the industry is able to lobby hard to get this off the ground quickly. An ordinance could bring in some positives. But the stocks are seeing strength as if extension is a foregone conclusion. This makes us less comfortable.

Technically Speaking: Sensex closed just above the key weekly support of 15560 levels. The uptrend seems to be buoyant and there is a good chance that we may challenge new highs as long as 15270 as a level is not breached. Volumes traded were good at over Rs 4864 cr for the day.