1st September, 2004.

Stock Market Review

The stockmarket is currently making a strong consolidation at the Sensex 5000 level, and
it seems that a gradual rise to about 5500 could well happen. The uncertainties which
overhung the markets a month ago have (by and large) been dissipated. The monsoon net
result is positive, oil prices (though high) have retracted from dizzy levels, and even with
our fractious and noisy national politics, Manmohan Singh seems set to continue at least
for the medium term. This means that P. Chidambaram shall present the budget next
February, and a build-up for that shall start within the next two months.
Corporate results for the second quarter 2004-05 are likely to reinforce a positive
sentiment. The success of the TCS public offer has helped to broaden as well deepen the
market. Foreign investors continue benign towards India, and barring some terrible
disaster (terrorism? communal riots?), there could be a build up to a broad-based secular
rally.
Set against this background, we are making some comments on specific scrip:
Defensive, index-related funds or scrip: Morgan Stanley, still at a 25-30% discount to
NAV, is one such; and Tata Investment Corporation with its price at a much higher
discount of at least 50%, and with an expected 4%-plus yield on future dividend payout,
is another possibility.
Banks and Housing Finance: Banks, especially the nationalized ones (the innumerable
ugly sisters) are unlikely to participate in the celebrations. Exceptions could be HDFC
Bank and State Bank --- especially if the latter consolidates through merger with its
subsidiaries, or other such exogenous factors. In housing finance, HDFC may still defy
gravity. It has a small subsidiary company, Gruh Finance, priced at Rs. 28-30 (face value
Rs. 10), which may be all right. IDBI slated to merge with IDBI Bank may soon see more
and more of its non-performing assets start performing, and hatchet-man Damodaran of
UTI may notch up a decisive double success. IDBI should cross Rs. 90.
Metals: Tisco, Hindalco and Nalco should do well. Steel Authority is (of course) the ugly
sister.

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Auto and auto ancillary sector has had a dream run early this year, but after completing
the process of correction the last few months from peak prices, companies like Telco,
Mico, Hero Honda, MRF, Apollo Tyres (now with an equity holding by Michelin), Exide,
Bharat Forge and Sundaram Fasteners still have potential upside. Automotive Stampings
(ASAL), in which Tata holding is 80%, should move up from the current levels of Rs. 62.
Cement: The shakeout through mergers and acquisitions has gone quite a bit of way, and
with prices firming up, Ultratech Cemco, Grasim, Gujarat Ambuja, ACC and Madras
Cements should do quite well.
Fast moving consumer goods (FMCG), neglected for a long while, is now seeing some
activity after the good monsoon. Hindustan Lever, after its spectacular fall, is one of the
best long-term buys --- all it requires is patience, holding power, and ability by the
investor to average downwards in the event of further significant fall. Nestle, Marico,
Dabur and Colgate should slowly move up. Dependant companies should also do well,
and Paper Products (a subsidiary of Van Leer) can be recommended..
Petrochemicals, Refineries: With the contrarians logic, this attention should certainly
be focused on this sector with cautious buying across the board of ONGC, Reliance,
MRPL, and the refinery biggies at every fall.
Software: TCS, TCS, and more TCS and perhaps some Wipro and Infosys it is unlikely
anyone will go much wrong with this strategy.
Hotels: Using the assets criterion, EIH is greatly undervalued. Indian Hotels may be
bought at every reaction.
Tea Plantations sector is an unlikely entrant to the list, but the industry (with pipeline
stocks having dried up, and significant improvement of auction prices) should do very
well in 2004-05. Obvious choices: Tata Tea, George Williamson, and Goodricke.
Power and Power Equipment, i.e., Tata Power, Reliance Energy, BHEL, ABB and
Siemens --- all it requires is holding capability and patience.
Miscellaneous: Apollo Hospitals looks a promising runner in the healthcare sector; Asian
Paints or ICI (i.e., paints) can be bought after the good monsoon. In the paper sector,
BILT still has some promise. ITC with its combination of FMCG, paper, and hotels,
should do significantly well; and the target should be Rs. 1350-plus. Welspun Gujarat,
which makes high-tech oil and gas pipelines with German technical collaboration, also
has an impressive export order book, and current operations are extremely profitable.
Pharmaceuticals, especially the Indian pharma sector, could be good defensive
investments. Prices have fallen significantly from the peaks, and contrarian logic
indicates that Ranbaxy, Dr. Reddys, Cipla, and Wockhardt should all be good buys.