Regaining mettle

Surprise of the recent rally has been metals index

With the Sensex closing over 10,000 points once again, the surprise of the recent rally has been the metal sector, with the BSE Metals index has gained 19.7 per cent from the low on June 14.

It was also the same metals sector, which was the biggest loser when the markets declined. Between the Sensex high on May 10 and June 21, the metal sector has declined 30.7 per cent.

The other sectoral indices that has done well are the BSE TECk, BSE IT and BSE FMCG indices. These were also industries that fell the least since May.

Capital goods like metals, was another index to have been one of the bigger losers since the Sensex high, but has come up rapidly. The Bankex, PSU and the Oil&Gas indices have lagged as the Sensex crawled back 12.4 per cent in the past five trading sessions.

These numbers indicate that investors are preferring sectors they think have fallen too fast - metals and capital goods - and have a chance of rising too.

There is also a bias towards defensive sectors -FMCG, which will do well thanks to the continuing consumption and the tech sector, where the business momentum is strong and companies are ramping up head count.

Investors are shunning banks as interest rates rise and deposit growth has become a trickle. Investors are also avoiding oil companies as the recent fuel hike is not going to be enough to combat higher fuel costs.

Sundram Fasteners: Input bites

Sundram Fasteners has reported 16.15 per cent y-o-y growth in standalone operating profit to Rs 151.76 crore in FY06 compared with 14.24 per cent growth in net sales to Rs 1061.99 crore.

Export sales have grown 23.75 per cent y-o-y to Rs 323.33 crore in FY06, given the company's steps to globalise operations via recent acquisitions and facilities in East Asia.

However, Sundram's consumption of raw materials rose 18.6 per cent y-o-y to Rs 465.32 crore in FY06, largely owing to higher cost of non-ferrous inputs such as aluminium.

Also, raw materials as a percentage of total sales rose 162 basis points to 43.8 per cent in FY06.

However, the company management has pointed out that its customers have been reluctant to accept price increases for Sundram's products, which include high-tensile fasteners, in spite of higher input costs.

As a result, cost reduction strategies have played a key role in protecting operating margins. Operating profit margins have expanded 30 basis points y-o-y to 14.3 per cent in FY06.

The Sundram stock has, however, under-performed the market since the start of CY06 - it has lost about 24 per cent during this period as compared to a 5.8 per cent rise in the Sensex.

The company had earlier acquired Germany-based Peiner Umformtechnik, in a bid to widen its range of fastener products for the European markets. Nevertheless, its consolidated operating profit margin remained more or less flat at 12.3 per cent on a y-o-y basis in FY06.

The stock gets a discounting of approximately 21.5 times trailing 12-month earnings and leaves little room for further upside.