Bourse has bottomed out

By Oommen A Ninan

MUMBAI, MARCH 12. The undertone on stock exchanges remained bullish even with sudden slowdown of purchases by foreign institutional investors and sustained offloading by operators early last week. However, investors, who were ignoring pharmaceutical and fast moving consumer goods sectors after the budget pronouncements for some time, started buying selectively during the week.

``In my view the market has bottomed out and should look up this week,'' said Mr. Shyam Bhat, Fund Manager, Tata Mutual Fund. There was sustained offloading by operators due to imposition of cash margins with effect from Monday. Earlier stock exchanges were accepting bank guarantees against outstanding positions, but have directed the brokers to pay 50 per cent of the outstanding amount in cash rather than bank guarantee. This has forced the operators to off-load their positions.

The losses were more pronounced in cash group and on the National Stock Exchange. The BSE sensitive index moved erratically in a wide range of 5783.51 and 5196.72 before ending the week at 5301.78 against last weekend close of 5378.27, netting a fall of 76.49 points.

The net outstanding position fell by around Rs. 500 crores last Wednesday followed by approximately Rs. 300 crores on Thursday. With a further fall in outstanding position on Friday, the net position is reasonable at Rs. 3,250 crore level currently. The carry-forward (badla) rate determined on Saturday was at 15 to 17 per cent.

Foreign institutional investors (FIIs) and domestic funds took advantage of the weakness in the market. FIIs especially turned buyers last Thursday and their net investment was around Rs. 180 crores on that day.

Bargain hunting was noticeable on Friday in stocks such as Hindustan Petroleum, Cadbury, Hero Honda and ITC. `` This is a good sign for the broader market,'' said Mr. Bhat. These companies are growing between 25 to 40 per cent and were unduly beaten down.

Now they are recovering. Software and pharmaceutical stocks may recover this week as the fall in these stocks post budget have got more than adjusted for the likely reduction in growth rate.

Said Mr. Bhat, ``Many software stocks are now at more than 30 per cent of their peak levels which means that even for those companies which are not enjoying the Section 10 benefit (companies which are having units in Software Technology Park continue to enjoy 100 per cent tax exemption), the fall has fully accounted for the peak tax rate that these companies may end up paying at the conclusion of next four years.'' The same reasoning holds good for pharmaceutical stocks such as Ranbaxy, Wockhardt and Sun Pharmaceuticals which have corrected by more than 35 per cent post budget.

Sectorwise, the banking stocks may also do well particularly, technology driven banks such as ICICI Bank and HDFC Bank. According to Mr. Bhat ICICI Bank in particular is expected to have favourable response for its American Depository Receipts (ADR) issue which is slated later this month.

For the banking sector in general, the provisions in the budget are broadly positive, especially the proposed reduction of minimum Government shareholding in the nationalised banks to 33 per cent from 50 per cent.

The capital market may witness a flush of banking papers. ``This would help banks to raise capital from the market to meet CAR requirements as they grow, especially banks that were planning to go for an ADR/GDR issue but were constrained by the minimum Government shareholding,'' stated a report prepared by SBI Capital Markets.

Further, the setting up of more debt tribunals would strengthen the institutional framework for reducing non-performing assets (NPAs). However, the budget has not mentioned about setting up an Asset Reconstruction Fund for the banking sector.

Moreover, the Government stance about fiscal pressures not permitting recapitalisation of banks has changed and it is willing to recapitalise if the banks have restructuring plan in place.

Removal of two per cent interest tax on income from advances is another plus point for the sector. Mr. Nikesh Shah, Research Head of Triumph Securities said, ``for a short term, this will have positive direct impact on spreads or margins of the banks.

However, over medium term, banks will adjust their lending rates so as to pass on this benefit.''

``Telecommunication stocks had a very favourable budget and stocks such as Himachal Futuristic and Global Tele-Systems could gain further,'' said Mr. Bhat.

These companies could gain because of large cash inflows - by way of preferential allotment in the case of Himachal Futuristic and divestment of stake in its e-commerce subsidiary in the case of Global Tele-Systems. Besides these, media stocks such as Zee Telefilm and TV 18 are also likely to gain ground.

The fast moving consumer goods sector, which was reeling under low volume growth, is likely to be further impacted by the budget measures.

``However,'' said Mr. Shah, ``on account of the competitive scenario (in markets like tooth paste), if the companies resort to absorb it then there will be a pressure on the margins.''

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