THEbenchmark index of the Bombay Stock Exchange (BSE) logged its seventh straight weekly gains, rising 0.5% on Friday to its best close in more than 11 weeks, with financials and automakers leading the gainers, while top moble firm Bharti Airtel declined. Firm Asian markets supported the gains.
The main index Sensex rose 0.4% this week, registering its longest streak of consecutive weekly gains since last June, buoyed by continued liquidity inflow and earnings optimism. Bharti Airtel fell as much as 2.7% as the leading mobile operator moved closer to wrap up its $9 billion deal to buy most of Kuwaiti Zain’s African assets.
The deal could push up the Indian mobile operator by four notches to be the sixth largest mobile firm in the world by customers, but the management and finances will be stretched. The 30-share BSE index Sensex closed 0.49% or 85.91 points higher at 17,644.76 points, its best close since January 6. Eighteen of its components closed in the green. “There are expectations that we will see good March quarter results,” said Jigar Shah, vice-president of equity sales at Motilal Oswal, a Mumbai-based brokerage.
“Also, foreign institutional investors (FIIs) have been consistently pouring funds, which has led to a liquidity-driven rally,” said Shah. Foreign funds have pumped in around $3.5 billion in Indian equities so far in 2010, a portion of which was absorbed by offerings in the primary market. If March quarter earnings fell short of expectations, it would negatively impact the market, dealers said. Financials gained on optimistic prospects in an advancing economy.
Top lender SBI rose 1.1%, while ICICI Bank and HDFC Bank gained 1.9% and 1.2%, respectively. Mortgage lender HDFC rose nearly 1%. Automakers rallied on expectations of robust sales for the current month. Top vehicle maker Tata Motors raced 3.4%. The 50-share NSE index Nifty closed 0.4% higher at 5,282 points.

IS MARKET beginning to peak out? The shift in volumes from the largecap space to mid-, and small-caps would seem to suggest so, going by the conventional wisdom, say brokers. In the past few months, trading volumes in top 100 stocks by market capitalisation have shrunk by 30-40% as investors shifted focus to second-line names perceived to be relatively cheap.
“Valuation-wise, large-cap stocks look expensive, while many stocks in the mid-cap segment still offer value. Every other week, we are seeing investors take fancy to some new sector,” says Mehraboon Jamshed Irani, Sr VP-Equity, FCH Centrum Wealth Managers.
Even as retail investors continue to keep away from the market, most stocks in the second-rung space are being accumulated by proprietary desk of broking firms and mutual funds that have a mandate to invest in mid-, and small-cap counters.
Almost 2,000 companies on the Bombay Stock Exchange (BSE) are currently trading at or near their 52-week highs, as fund managers and investors bet on the next multi-bagger stocks. Large-cap stocks have been moving in a narrow range for many months now. This has prompted investors to look to mid-, and small-cap shares for higher returns.
“Large-cap stocks have already run up in the past few months and are trading at a high price-to-earning multiple (P/E). This is part of the cycle and people will continue to buy mid-, and small-caps till the valuation gap is filled,” says Bharat Shah, head-institutional sales, Ventura Securities.
“While large institutions hardly invest in companies outside BSE 200, it’s the domestic HNIs and some mutual funds which usually get attracted to these stocks,” he says.
Average daily volume in top 100 stocks by market capitalisation stood at Rs 2,860 crore and Rs 11,300 crore in November on BSE and NSE, respectively. This has come down to Rs 1,875 in the case of BSE and Rs 8,100 for NSE in March.
“While the participation from retail investors is low, it has slowly been picking up, as the market outlook has been improving in the past few weeks. But this time, the orders are smaller and the derivatives segment is a strict ‘no’ for them,” says the retail head of a domestic broking firm.
In the category of top 500 to 5,000 stocks, volumes have gone up from Rs 550 crore to Rs 822 crore for November in the case of BSE. In the case of NSE, for top 500 and above stocks in terms of market capitalisation, the turnover has almost doubled from Rs 400 crore to about Rs 785 crore.
Experts feel that there are still a good number of stocks available at reasonable valuations. But investors will have to be careful before buying them. While selecting, they should go for stocks with higher dividend yield and good earnings track record.
“Even if sentiment remains positive, the rally is expected to narrow down to select stocks in the next few days. Companies with a wide variation in quarterly earnings, and those with balance sheet problems should be avoided even if the shares have been rising of late,” adds Mr Mehraboon.
Experts feel that like in the past, shares of many fundamentally-weak companies have climbed to stratospheric levels, only to leave investors stranded later on. Investors should avoid risking their portfolio by putting in money in companies without checking their credentials.

PROSPECTIVE mutual fund and ULIP investors can now use the standard messaging service or SMS to make payments, rather than issuing cheques, while buying units. Icra Online has entered into a strategic tie-up with an international agency for setting up a new payment gateway in India.
Credit rating agency Icra’s tie-up with SWIFT, or Society for Worldwide Interbank Financial Telecommunication, is aimed at bringing down the turnaround time between making payment and receiving units in hand.
When an individual buys units of a mutual fund, he has a choice to make the payment through a cheque or by internet. Once this payment gateway is in place, the customer can instruct the fund house to use the payment gateway route. At the same time, he will be required to confirm the purchase or sale order to this payment gate company either through SMS or through email.
“This move will enable better fund management for asset management companies and also result in instant transfer of funds for customers,” said Sanjoy Banerjee, executive director at Icra Online.
Icra’s payment gateway
service could face stiff competition from private and foreign banks as they already provide customers the option to make their payment through the net banking route. “However, we are looking at tier-II and tier-III cities where the mobile penetration is high and usage of internet banking is very low,” said Mr Banerjee.
SBI Asset Management — the mutual fund arm of SBI — recently enabled its customers to make their payment through State Bank of India’ ATM debit card.
“The service will be available from the fourth quarter of 2010-11,” said Arun Tiwari, head of Indian-sub-continent at Swift. Icra Online and Swift will have to tie up with fund houses for offering this service. The Belgium-based Swift provides financial messaging network and facilitates transfer of funds between Indian and overseas banks.

MORE and more individual savers are preferring the government’s small savings schemes to bank deposits, a trend that could make it difficult for banks to meet their business targets.
According to projections made by the central bank in the October monetary policy, bank loans would grow 16% while deposits would rise 18% during the current fiscal. For this to happen, banks will have to lend almost Rs 130,000 crore by March, and mop up Rs 161,000-crore deposits.
The latest figures released by RBI show a 13.8% growth in deposits as banks have raised fresh deposits of Rs 529,221 crore between April 2009 and February 2010. The growth is lower than 16.8% recorded between April 2008 and February 2009. This is reflected in the sharp slowdown in term deposits of most banks. Fresh term deposits raised between April 2009 and February 2010 is Rs 483,653 crore, which is Rs 97,000 crore less than what they raised during the same period of the previous financial year.
Bankers attribute the slowdown in deposits to decline interest rates in the current financial year. “Interest rates offered by banks are very low compared to that offered by small saving schemes of the government. Thus there is very little interest to invest in bank-term deposits,” said Andhra Bank CMD RS Reddy. Small savings scheme offer 8% while banks’ offer around 6.5-7.5% on term deposits.
Also, there has been a conscious effort by many banks to slow down deposits mobilisation with loans failing to pick up. According to Bank of India executive director M Narendra, banks have not aggressively pushed for deposits this year because of a slowdown in credit offtake. “At the same time, there is a shift towards small savings scheme. But from the macro point of view, there may not be an impact on the overall savings rate,” he said.
Banks have been progressively reducing the return on term deposits since November 2008. Peak interest rates on a five-year term deposit has come down from 10% in 2008 to below 8% now. This has resulted in a shift of savings from banks to other avenues, including small savings
KIM
schemes such as post office monthly deposit schemes, National Savings Certificates and the Public Provident Fund (PPF). The interest rates on these schemes are fixed by the government and are capped at 8% for most of the schemes. Compared with bonds issued by the government, the small savings schemes are a more expensive form of borrowing.
Finance ministry data also indicate a surge in money flow into these schemes. Fresh mobilisations through savings certificates and deposits from April 2009 to January 2010 amounted to Rs 28,638.81 crore compared with outflows of Rs 13,816.49 crore in the year-ago period. A fresh inflow of Rs 11241.28 crore into PPF — another popular scheme — has come this year against Rs 196.90 crore in the year-ago period.

TRADING in interest rate futures is fast diminishing, with barely Rs 13 crore worth of contracts changing hands in March so far, compared with Rs 1,473 crore in September last year when the instrument was just relaunched. Interest rate futures (IRF) are used by fixed income traders for protection against adverse movement in interest rates.
The failure of the product to take off in India comes in the backdrop of IRFs being one of the most popular derivative instruments globally. Experts are blaming this on the extra advantage that the current set of rules give to the seller of the instrument.
“The underlying bonds are illiquid and cash settlements are not allowed,” says Jagannadham Thunuguntla, equity head, SMC Capitals, adding, “It is biased towards the seller of the contract as the buyer could end up getting delivery of illiquid securities.”
The local version of IRFs involve the seller delivering actual bonds instead of the difference in the predetermined and market price — a practice called physical delivery. In the stock and currency futures segments, this is done through exchange of cash.
In December last year, in a bid to boost volumes, the National Stock Exchange (NSE) had restricted the universe of securities that could be delivered as part of the physical settlement. From close to 19 securities, the number was brought down to six bonds. But this too has failed in having the desired effect.
Only three bonds account for 70% of the total volumes in the GSec market. Other bonds are barely traded, dealers point out.
Mr Thunuguntla also pointed out that the level of awareness among market participants about the product is quite low, restricting participation in the segment.
Arvind Konar, head of fixed income, Almondz Global Securities, says big players like insurance companies and mutual funds are still shy away from dabbling into the IRF space because of poor volume and liquidity issues. “This has become a self-fulfilling prophecy since a substantial amount of volume was initially expected from these large players,” he explained.
Earlier in June 2003, NSE had introduced interest rate futures contracts. However, market participants were not comfortable with its design. Globally, the interest rate derivative market is much bigger compared to major asset classes such as equity and equity derivatives. In the US, it is more than 10 times bigger compared to other asset classes.
Mr Konar says the absence of short-term instruments as underlying is also responsible for illiquidity. The only futures available currently are those with a notional 10-year bond as underlying.
According to experts, banks can be indifferent to yields for a quarter of their G-Sec portfolio, as it is classified as held-to-maturity (HTM) and does not have to be marked-tomarket (MTM.) Once the International Financial Reporting Standards (IFRS) is introduced in April 2011, volumes may pick up as the entire G-Sec holdings will have to be MTM on a daily basis, Mr Konar said.
The other key reasons, players said, is the rule restricting short sales and the absence of a well-developed corporate repo market.

ASLEW of mid-sized companies are gearing up to tap the equity market in the near term, piggy-backing on the prevailing feel-good factor in the market. This rush to raise capital may also see some companies with ‘not so good a track record’, pass muster, say merchant bankers. It is time for investors once again to err on the side of caution, they said.
A large number of mid-sized companies are raising Rs 25-200 crore via initial public offerings. While many have received the regulatory approval, many more have filed their draft red herring prospectus (DRHP) with the market regulator.
“This is a symptom of a bull-market cycle. At such times there is a need to go back to basics. Investors should look at management quality, the sector in which the company is present, its track record, irrespective of who is the banker to the issue, before taking a decision,” said Brijesh Koshal, head-investment banking at Daiwa Capital Markets.
Equity market flows, post a tepid start early this year, gained traction with purchases by foreign institutional investors (FIIs) touching close to $3 billion dollars in March 2010 alone. Portfolio investors have been net buyers to the tune of $3.11 billion year-to-date.
Equity analysts said that the feel-good factor that prevailed in a week dominated by ‘macro’ news flow — inflation rising to 9.9%, S&P upgrading India’s outlook to stable and the Reserve Bank of India raising rates in an inter-policy move — signals higher flows.
According to Prime Database, the issues that have received regulatory approvals and are likely to enter the market soon include AMR Construction(Rs 175 crore), Ankita Knitwear (Rs 25 crore), Aravali Infrastructure (Rs 100 crore), Kabirdas Motors(Rs 62 crore), Mandhana Industries (Rs 135 crore), PCI (Rs 60 crore), Sea TV Network (Rs 50 crore) and Usher Eco Power (Rs 52 crore).
“Apart from the quality of the book, pricing and valuations should play an integral role while subscribing to an issue,” says Nimesh Shah, MD of Fortune Financial.
Senior investment bankers are of the view that the market response to some of the mid-sized issues that listed in the past couple of months, has infused an element of optimism in companies in the mid-cap space that have been wanting to raise cash.
In a strange disconnect, while larger issues and PSU issuances saw lukewarm subscriptions, the smaller, mid-sized issues were not only oversubscribed several times but also listed with gains. A grey market premium added to the buoyancy. Issues like ARSS Infrastructure, Infinite Computer Solutions, DB Corp, Jubilant Food Works were among those which were subscribed by more than 25 times.

You manage around $1.5 billion in an India-dedicated fund. What is the overall view that you are taking on the region?
Wehave been fully invested in the past six months, because our view is that though valuations are not inexpensive, there is no extreme overvaluation at around 16.5 times forward earnings. There is a clear opportunity within the market in certain sectors and that is what has played out in the past six months. Certain sectors and stocks have played out better than the rest of the market.
What is your time and return horizon? What have you bought since you are fully invested?
We always ask our investors to come with a perspective of at least 2-3 years, because in the near term, the market can be choppy. Tomorrow, if you have any global sovereign crisis or something else, the market can quickly correct by 15-20%. But let’s realise that the emerging markets growth story is a real story. For instance, in the past one year, investors in our funds in Korean bonds would have made gains of nearly 150-160% across funds.
We feel that since valuations are not cheap, you will see a time correction. So, we expect the market to be range-bound till mid-June. And as inflation tapers off, it will peak off in early May or June. And as people draw more comfort from FY12 earnings, we expect the market to take the next leg-up from there. In terms of sectors, we are positive on financials. The sector has underperformed since last July but we are clearly behind the inflation harm. Apart from that, autos and pharma are the other interesting sectors.
If you were to review your portfolio at the moment, what would you get out of?
We have been booking some gains in commodities. The belief is that commodities, in general, and steel, in particular, may look slightly vulnerable, if we have some kind of a slowdown in China next year. Look at the steel intensity of that economy that’s nearly twice that of the US and other developed economies. So, steel is one specific space where we are booking some gains. In terms of increasing exposure, real estate is one space we have virtually very little exposure. So, we are gradually building our exposure into real estate. PSU banks have underperformed, and on every dip, we are looking to add to our positions in these banks.