Bank scrips may rise on good valuation

MARKET WATCH

Government's anti-inflation measures are likely to weigh down cement and steel stocks.

Bank shares are likely to rise next week because of their attractive valuation. Moreover, analysts see a rise in credit demand following the strong February industrial production data, leading to a bullish sentiment on banking scrips.

"PSU (public sector undertaking) banks have not been very aggressive in forex derivatives. Also, the market is gradually discounting a CRR (cash reserve ratio) hike after the sustained rise in inflation since the last few weeks," said Priyadarshi Srivastava, vice-president, institutional sales, Anand Rathi.

Industrial production improved to 8.6 per cent in February from 5.8 per cent a month ago.

Credit growth slowed substantially in 2007-'08 to 21.6 per cent from 28.1 per cent a year ago, on the Reserve Bank of India's (RBI) sustained monetary-tightening measures. However, the upside in bank shares is seen limited on worries over further monetary-tightening measures from RBI.

"A rise in inflation means that RBI may hike CRR at the annual policy. A CRR hike is negative for bank stocks," said Hemindra Hazari, head of equity research, Karvy Securities.

Inflation for the week to March 29 jumped to an over 3-year high of 7.41 per cent from 7 per cent a week ago.

Recently, RBI Deputy Governor Rakesh Mohan indicated that any step that was likely to be taken to control inflation would be in the annual monetary and credit policy, which will be released on April 29.

Bankers and analysts expect RBI to hike CRR by 50 bps.

There is around Rs 86,000 crore of government spending lined up that would add to liquidity, Hazari said.

The liquidity overhang would add to the inflationary pressure, which might prompt RBI to hike CRR, economists said. The market is gradually discounting a CRR hike as inflation continues to remain very high.

Crude shock for oil: Shares of state-run oil marketing companies (OMCs) are likely to remain positive next week tracking broader markets, according to analysts.

"Shares of oil companies are expected to move up with broad markets despite high crude oil prices and mounting under-recoveries. The quarterly results of technology bellwether Infosys results may trigger a run-up in stocks," Arun Kejriwal, director, Kejriwal Research and Investment Services said today.

However, rising crude oil prices could have a negative impact on oil marketing shares. The total under-recoveries during 2007-08 were Rs 77,300 crore, and industry officials expect it to touch Rs 1.3 lakh crore during 2008-09 if crude oil prices remain at the current level.

India's crude oil basket on Thursday touched an all-time high of $104.41 a barrel (about Rs 4,166), up $1.70 a barrel from Wednesday.

IIP push for steel: Steel company scrips are likely to remain positive in the wake of robust numbers of industrial production (IIP) for the month of February.

The country's industrial growth improved to 8.6 per cent in February from 5.8 per cent a month ago on the back of strong performance by electricity and capital goods sectors.

"February numbers have allayed fears that industrial production is slowing and show that demand for steel is back," an analyst at a domestic brokerage said. Production of capital goods accelerated by 10.4 per cent, offsetting the decline in the growth rate of consumer durables to 3.3 per cent.

However, spiralling inflation rate, added with fears of price control, will continue to have a negative impact on steel stocks, according to analysts.