Weekly Close: year end game or is it a sustainable recovery ?

Indian indices finished with yet another volatile week but with gains of 9.5%. Strong recovery was led across the board. Short covering on F&O settlement also led to recovery. Global markets continue to what they are but they are the reason why there seems to be some better performance in the Indian Markets.

This is also last week of the financial year. FY2007-08 was a good year for investors. Market had crazy rally during the year. It crossed 13k. then 14k then 15k then 16k..17k.. 18k?19k..20k..21k ! The rally post 15k was said to be driven by hot money. And to curb this FM made registration of FII's mandatory. This led to some correction in the market but recovery was again swift. The confidence during the year was so high that streets were talking about Indian markets decoupling from US ! Every one was positive. But then subprime issue emerged in US and it was again proved that the decoupling was only in theory. Emerging markets have not yet decoupled with US. Indian markets went into reverse gear post the subprime worries. US continues to struggle with its economic woes and recession talks are still on. FY2009 could bring some relief.

Inflation crossed 6% and stood at 6.68% led by Metal and Food items. Inflation is at 12 months high. The increase was led by metal and food items. Fuel surged by 1% which has around 14% weight age on WPI index. This is much higher than the RBI's tolerance rate. In such scenario probability of rate cut seems bleak and there are talks of rate hikes as well.

It was quite a volatile week, but it still turned out to be the biggest weekly gain for the Sensex. The BSE 30-share index gained 9.5%, while the Nifty added 8% over the week. Realty index +12.7%, IT index +11.5%, BSE Capital Goods index +10.4% and BSE Bankex +9.4%. These are followed by FMCG index +8.2%, Metal index +8.6% and Oil & Gas index +7.7%. Bhel +13.35%, DLF +10.91%, HDFC +19.30%, Hindalco +13%, Infosys +14.39%, ITC +10.57%, JP ASSO +17.65%, Larsen +10.53%, REL +10.85%, Tata Steel +12.98%, Wipro +21.35%. Ranbaxy -2.49%, Tata Motors -0.22%,

Tata Motor completed its Land Rover Jaguar deal for $2.3bn. This is a big deal. Aggressive bidding would increase the debt burden..This has already weighted on the stock. The counter continues to be weak. For now this would continue to weigh on the stock. Time will only tell whether Jaguar and Land Rover acquisition would turnaround. It may be a feather in the cap for Tata Motors but certainly the shareholders have not appreciated the same. At least not yet !
Gujarat Heavy Chemicals Ltd (GHCL) which operates in two segments namely Soda Ash & Home Textiles and also has a strategic interest in ITES business through its KPO unit. Recently GHCL Management planed to demerge the whole business namely Soda ash, Retail, and Home textiles. The company will continue to remain listed. The home textile and retail business is to be shifted into 100% subsidiaries. GHCL reports that the demerger will be effective from April 1. It makes a strategic sense for GHCL as it will be better to focus and valuations for each of these businesses. In view of the value unlocking potential arising out of restructuring of business is stable soda ash business. We believe that there is not much direct synergies between soda ash and home textiles and expected restructuring will not affect the performance of the company. Hence, the story remains the same. Re-structuring activity will have a positive impact for the longer term business growth.

Sujana Metals (SMPL) which is into value-added steel products was the star for the week. It manufactures various types of TMT steel bars, structural steel and re-rolled steel products used in towers for both power and telecom sectors apart from being used in construction and industrial segment. The stock rallied soon after a report stated that it is close to acquire a steel plant in Vizag at a cost of INR 150 cr. Company has lined up huge capex of Rs.1600 Cr in two phases to put up this capacity. De-merger of tower business would provide much required focus and unlock value and Capacity enhancement would provide economies of scale.

Government has withdrawn the Duty Entitlement Passbook Scheme, or DEPB benefit on cement. The government has also scrapped the DEPB on manganese, chrome and ferrous metal. Ambuja Cement, Ultratech and Gujarat Sidhee Cement are the major cement exporters. The government's move on DEPB is aimed at controlling increase in the commodity prices and to increase local supplies which can help indirectly to control inflation. The DEPB is 3% on Cement, so this doesn't have impact on cement exporters.

We still have one last day of the year to go. This is the day where the prices of the stocks are used to determine the NAV of the many funds which are invested into India. Mid caps which have had a battering are seeing some level of sharp recovery. There is a reason of undervaluation in that and also some level of NAV propping as sellers are also unwilling to sell. Also small level of value buying is helping a bit. Next week of course marks the beginning of the new fiscal year. Some level of taxes will come into force and that may tend to reduce volume.. but in the bigger scheme of things this does not matter too much and soon will be over come just like STT was. Going ahead, we believe that the markets will tend to be a bit more decoupled from Global markets and the upside is there on cards. We are not too worried about inflation as others seem to be. We believe that there is a base effect and that should wear off by the end of April.

Tech view on markets: Sensex has crossed the resistance zone of 16300 with a penant formation in the intraday charts. This gives a bullish view on the market with a target of 17000--17100.