Inverse gains

The Sensex is inversely related to the dollar-euro rate

The chart says it all. One look at it will show the remarkable inverse correlation between the movement in the dollar-euro rate and the BSE Sensex. The lower the dollar against the euro, the higher the Sensex.

The explanation offered is simple""worried by plunging dollar, US investors have been investing abroad, and recent foreign portfolio inflows reflect that fact. And since dollar weakness is the driver, what holds true for India should be true for all non-US markets.

But, at first glance, that doesn't seem to be the case""""while the MSCI Index for the US is up 9 per cent this quarter, the MSCI World ex-USA Index has risen by a much lower 6.2 per cent.

However, that's in local currency terms""adjusted for the fall in the value of the US dollar, the MSCI World ex-USA index has risen by a huge 14.3 per cent. Simply put, it's the weaker dollar that makes non-US assets fetch a higher return.

The MSCI Index for India, however, has fetched higher returns even in rupee terms, rising by 17 per cent this quarter. After adjusting for dollar weakness, the rise goes up to a massive 23.2 per cent. Clearly, as long as the dollar continues to fall against the Euro, foreign portfolio inflows are assured.

Two-wheelers: the importance of volumes

There seems to be no let up in demand for two-wheelers. After strong sales in the festive months of October and November, demand usually flags in December.

However, this time around, dealers are estimating that sales could grow 13 per cent year-on-year in December against the 10 per cent expected earlier, driven by demand for motor cycles.

One reason for this is the spillover effect of festive season which saw manufacturers throwing in discounts and freebies. Apparently, the demand in October and November is yet to be met and there are waiting lists for a couple of models such as the CT 100 as also Honda's 150cc Unicorn. Dealers continue to offer attractive finance schemes and discounts and they are not overstocked.

An interesting trend being witnessed is that three larger players Hero Honda, Bajaj Auto and TVS Motors are chipping away at shares of smaller players. Further, the top two have seen their market share climbing from 66 per cent in 1999 to 79 per cent in H1FY05.

The conclusion to be drawn from this is that manufacturers need to sell large volumes so that they can price products attractively in a cut-throat market and offer freebies and discounts to lure buyers.

In an environment where raw material costs are going up this is all the more difficult.

Moreover, companies need to continuously launch new products or variants and spend on marketing. With players such as Kinetic, LML and Yamaha losing share, consolidation in two wheelers may not be far away.

Mid-Day Multimedia

The Mid-Day Multimedia stock was frozen at the upper circuit breaker in Wednesday trading, on reports that Rakesh Jhunjhunwala had picked up around 5.28 per cent of the company's equity through market purhases. at Rs 50.07 a share.

For several months, there had been market speculation of large investors eyeing a stake in this company, which prints Mumbai's widely read evening tabloid.

As a result, this stock which was hovering at around Rs 28-Rs 29 in mid-September has since gained approximately 150 per cent over the last three months. However, the management maintains that there's no plan to dilute control.

Of course, recent signs of a pick up in corporate advertising has lead to other media stocks also attracting investor interest "" print house Sandesh has risen around 47 per cent over the last two months, while Zee Telefilms has gained 17 per cent.

The Mid-Day stock, however, has been rising in spite of lacklustre performance. In Q2 FY05, the company reported a 29 per cent drop in profit before tax to Rs 1.85 crore largely owing to increased segment losses of its outdoor business.

Segment losses had increased 118 per cent to Rs 0.85 crore in the last quarter largely owing to an approximate 33 per cent increase in license fees.

As a result, operating profit had declined 19.35 per cent to Rs 2.5 crore in the last quarter and operating profit margins fell 364 basis points to 10.36 per cent.

Going forward, an improvement in the company's margins are anticipated owing to signs of improved advertising rates as well as various cost control measures implemented. However, with this stock trading at a P/E of around 27 times ( trailing 12 months net profit) it does appear full valued.

With contributions from Shobhana Subramanian and Amriteshwar Mathur