The Hindu : Stock Market: Cautious undertone prevails

Online edition of India's National Newspaper
Sunday, Feb 02, 2003

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Stock Market: Cautious undertone prevails

By Oommen A Ninan

MUMBAI FEB. 1. The undertone on the stock exchanges is cautious amid fears of an imminent war in West Asia. However, the inflow from foreign institutional investors (FIIs) has been on the rise on Indian bourses and renewed buying support witnessed on the last day of last week helped stock prices to move up.

``Over the past several weeks, we have been cautioning that the Sensex was poised for a correction and that investors should adopt suitable protective measures in case of a breach below 3300. Last Friday, the Sensex decisively broke below the 3300 level. It can thus be concluded that the intermediate upmove from 2828 appears to have ended at 3416 and a short-term downward correction to this upmove is now underway,'' said M. K. Srivatsan, Technical Analyst, Darashaw Broking.

The downside targets for the correction are 3191, 3122 and 3052 which are the 38.2 per cent, 50 per cent and 61.8 per cent Fibonacci Retracement Levels of the rally from 2828 to 3416. Of these, the 3191 level is significant as the Sensex has strong horizontal supports around 3180-3190. Friday's low was at 3199, thus retracing almost 38.2 per cent of the entire rally. The 89-day simple moving average, now at 3160, has been a good indicator of intermediate trend reversals in the past one-year. This moving average is now sloping upwards and is expected to offer support in case of any decline from the present levels. Immediate downside is limited to about 3180 as the short-term momentum oscillators are slowly trudging to the oversold territory. However, the Sensex is expected to face strong selling pressure above 3300. Thus, the upside seems capped for the moment as well.

Long-term investors can use declines below 3200 to stagger their purchases around the support levels. Partial profit booking is recommended in case of an immediate rally above 3300.

"Some of the stocks that can be bought now and on declines include Glaxo, L&T, Telco (around Rs. 143-144), Reliance (around Rs. 265) and Hindustan Lever (around Rs.163). Investors holding Satyam can remain invested with a stop loss of Rs. 214 and those holding Infosys can remain invested with a stop loss of Rs. 4170, `' Mr. Srivatsan felt.

The benchmark Bombay Stock Exchange sensitive index (Sensex) lost 37.48 points at 3250.38 during the week ended January 31 against 3287.86 in the previous week. On the National Stock Exchange the S&P CNX Nifty was down by 14.20 points at 1041.85 against 1056.05.

"We foresee fresh retail investments (Rs.10,000 crores), reversal in trend of financial institutions (outflow of Rs. 6,600 crores in 2000-02) towards equities and higher FII flow driving equity markets upward in 2003-04. Increased `liquidity' due to Kelkar Committee's sops to exempt dividend income and long-term capital gains will re-rate equity valuations. With post-tax G-Sec yields coming down to 4.5 per cent lower than dividend yield, we expect equity to be the most attractive asset class in 2003. We believe growth in cash flows (26 per cent CAGR for financial year 1996-2002), reduced debt/equity ratio and trends of higher payout (47 per cent in financial year 2002) are signs of improving fundamentals. We recommend overweight on stocks offering valuation plays, growth stories, dividend yields and high liquidity,'' said S. Naren, Director, HDFC Securities.

Payout ratios have increased consistently over the last ten years and Mr. Naren foresees Indian corporates improving on this trend leveraging on the growth in cash flows. With 50 per cent of Sensex having promoter holding over 30 per cent and factoring an expected exemption of dividend tax for corporates and investors, he expects promoters adopting a higher distribution ratio going forward. Continuous improvement in dividend yields is expected to protect downside risk of return on investment in equity. Going forward, higher payout will further improve dividend yields while we expect interest rates to remain flat. In our opinion, the recommendations in Kelkar committee's revised report will herald a major change in attitude of retail investors as the report contains following triggers for investment in equities.

While G-Sec yields (364 T-Bill) were attractive at 8.8 per cent in April 2001 against 5 per cent yields from dividends, with expected exemption of dividend tax and G-Sec yields coming down, dividend yields will make equity investments relatively more attractive than investments in G-Sec. A G-Sec yield of 6.3 per cent pre tax corresponds to 4.5 per cent post-tax today and is lower than dividend yields of a host of companies. Hence, dividend yield of 6 per cent is possibly a better investment than debt instruments considering valuation upsides.

Exemption of long term capital gains proposed in the Kelkar committee report is expected to make equities the only asset class where investment over more than one year timeframe will lead to nil taxes. This is likely to cause a big move in the high tax paying segments towards equities, which will increase liquidity in equity markets.

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