| Leveraged counters are the worst-hit
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| The question weighing on every investor’s mind after the bomb blasts is whether the rally in the markets is in danger of being derailed. One glimmer of hope was provided by the market pulling back from the lows it hit immediately after the blasts, but brokers say that a large part of that recovery was due to short covering.
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| Also, the market was apparently supported at the lower levels by the Life Insurance Corporation of India. Much of the selling was in highly leveraged stocks, with punters in these stocks unable to meet margin calls and dumping their stocks instead.
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| Stocks with large F&O open interest were also hit by unwinding of positions in the derivatives market. But the critical players, of course, will be the foreign institutional investors (FIIs). It is they who made the rally and they who can break it.
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| According to market experts, FIIs are expected to be net sellers, especially given the huge amount of purchases they have made lately. For instance, FII net purchases this month have been worth over Rs 1500 crore.
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| Needless to say, FII activity in the next few trading sessions would have a huge bearing on future market direction. But most market players do not expect much of a downside from current levels.
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| Technical analysts point out that there is strong support for the Sensex at the 3950 and 3880 levels. They expect the markets to move in a narrow range and consolidate at current levels.
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| Importantly, what’s happened as a result of the bomb blasts is that it’s provided a trigger for a long due correction in the Indian markets. The Sensex had risen almost 1200 points, or around 40 per cent since mid-May, and most of this rally was uninterrupted.
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| The bomb blasts have at least provided a reason for the markets to stop and ponder about the whole rally. Yet, going by the price movement on Monday, and especially the way in which many stocks recovered some of their losses, brokers believe that the correction would not be very sharp. It’s just that there would be a stop to the unabated rally.
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| Indications from the derivatives market were mixed, with experts pointing out that one needs to observe data for at least one more trading session to ascertain the future direction of the market.
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| One positive sign, however, was that although volumes on the Nifty futures jumped to over 100,000 contracts (the previous highest volumes were around 50,000 contracts), the reduction in open interest was just 17 per cent.
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| In earlier cases where there has been a equally sharp correction in prices, the reduction in open interest has been even higher. Nevertheless, with reports of investors unable to sell because of telephone lines being jammed after the blast, the next few days are crucial for the market. Needless to add, the FII figures should be watched like a hawk.
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| Bongaigaon Refineries
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| Bongaigaon Refineries hit a 52-week high on Monday, and the bomb blasts didn’t make much of a difference to its price. BRPL’s stock has appreciated an astounding 369 per cent since March despite the fall on Monday. Is such a huge rise justified?
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| The main problem for the refinery was supply of crude since there is no pipeline network and the company has to import crude. As a result, the high freight costs in transporting the crude to its refinery made operations unviable.
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| That problem has now been resolved and the company has begun receiving crude from the Ravva oil fields according to a government diktat. Therefore, the main driver for BRPL’s revenues and profits is the improvement in capacity utilisation of its refinery.
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| As a result, capacity utilisation is expected to increase from 63 per cent in FY03 to around 85 per cent in the current year. The crude from the Ravva oil fields is better suited to production of lighter distillates like petrol and diesel, which also attract higher excise duties.
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| But last year’s Budget had exempted the north-eastern refineries from 50 per cent of excise liabilities resulting in gains of Rs 217 crore in FY03. With an improvement in capacity utilisation, the amount of exemption would also have increased.
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| Further, given the logistical as well as input problems, the company’s 30,000 tonne polyester staple fibre (PSF) and 45,000 tonne dimethyl terepthalate (DMT) plant was also shut leading to accumulation of losses.
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| With an improvement in the refining operations, there would also be an improvement in the performance of the polyester plant. Additionally, a significant contributor to the performance of the polyester plant would be a possible joint venture with Reliance Industries for production of PSF according to Reliance’s requirements.
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| Analysts expect the petrochemicals plant to come back on-stream in the third quarter after tie-ups with customers. The improved cash flows are also being used to pare debt levels, which will further add to the bottomline. BRPL had already reduced its interest cost in FY03 by 31 per cent.
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| Best of all, despite the appreciation in it stock price, the company’s FY04 earnings are still discounted around 3.75 times.
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| With contributions by Mobis Philipose and Sameer Ranade |
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Content Guide
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