Raging Bull

The stock markets have covered the 1000-point decline of October and closed at a new high on Friday. If FIIs were the driving force in taking the Sensex to 8821 points on October 5, their sales of Rs 3,805 crore in October were also part of the reason for the Sensex falling 15 per cent by the end of October. This month till November 24, FIIs have brought in Rs 3,487 crore, which has led in both the Sensex and Nifty reaching these levels.

Though some brokerage houses told their clients that India was overvalued during November, foreign fund flow has only gone up. On the other hand, domestic mutual funds have taken a contrarian stance since October.

They bought shares worth Rs 2,905 crore in October when FIIs were selling. This month they have mostly sat on the sidelines, investing only Rs 363 crore till November 24.

The appetite for equities has gone up again and most markets are rising. Though this rally is driven mainly by liquidity, there are some discernible changes as compared to the October high.

Brent crude oil price, which was just below $60-levels then, has declined to the $52 levels. If the September quarter results were not exciting for many manufacturing companies, their outlook has improved as falling commodity prices will help in a reduction in raw material costs.

Some respite on the interest rate front is also expected as the US Fed may stop hiking rates in the near future. Stock prices have risen across the board, except in commodity companies like Tisco and Hindalco.

Ranbaxy has fallen 27.7 per cent from its October high as the company is mired with litigation issues. The dollar too has appreciated from Rs 44.28 in early October to Rs 45.81 now, which has resulted in technology stocks rising.

Unlike the October rally, this time it is the large-caps which remain the favoured lot. The BSE 100 and the BSE 200 are both slightly below their all-time highs but mid-cap and small-cap indices are still far. Going forward, FII fund flow is expected to remain strong. The Sensex is valued at a P/E of 17.33 on a trailing basis, which is high. Now, it is time for fundamentals to catch up with liquidity this quarter.

Cement: Operating costs dip

Cement prices have improved marginally across several key markets but a key factor that has improved investor sentiment has been signs of reduction in operating costs.

For instance, the cost of imported coal has fallen by about 5-7 per cent over the past two months and this is expected to help players like Gujarat Ambuja and ACC. In the case of Gujarat Ambuja, power and fuel accounted for nearly 25.6 per cent of consolidated net sales in the September quarter.

Also, while road freight costs have seen an uptrend due to the recent hike in diesel prices, companies like Shree Cement and Gujarat Ambuja have managed to keep a tight check on costs thanks to innovative strategies.

In the case of Shree Cement, analysts highlight the efficiencies derived by the company by just-in-time supplies to its dealer network coupled with better credit terms from transporters. This strategy enabled the company to lower its freight and selling expenses as a percentage of net sales by almost 68 basis points to 16.48 per cent in the September quarter.

This reduction in operating costs has not gone unnoticed by the Street and several cement stock have outperformed the Sensex over the past one month.

For instance, Gujarat Ambuja has gained about 17.3 per cent as compared to a 10.8 per cent gain in the broader market. ACC, too, has gained about 14.2 per cent during this period.

Cement despatches have shown an upturn in October after a sluggish September quarter. Going forward, the traditional pick-up in demand in post-monsoon season is expected to help cement prices remain firm in the current quarter.

However, stock markets appear to have already factored in the growth opportunities in this sector "" Gujarat Ambuja trades at about 18.5 times estimated earnings for June 2006, while ACC trades at about 19 times forward earnings.