The Telegraph
Since 1st March, 1999
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Last Week

The market crashed on Tuesday, went up on Wednesday, went up further on Thursday morning and crashed 100 points from there to give the first weekly lower closer since May 23 (when the index was 3050). We have had a breathless rise since then and it only needed a small, tangential negative news to send punters running scared. The negative news was that the Reserve Bank of India will check the flow of hot money coming in the through the NRI deposit route. By Friday afternoon, the market had crashed 125 points from the Thursday morning high but recovered from the dayís lows.

Interestingly on Thursday when the market was collapsing, CNBC was broadcasting the views of Credit Lyonnais Securities that the firmís year-end target for sensex was 4000. CNBC commentators presented the findings as highly bullish without realising that the same morning the index had hit 3750. One of the key reasons for the fall was large scale selling in Hindustan Lever. Letís look at that stock.

I have watched with interest the rise of HLL from Rs 132 level all the way to Rs Rs 180 as analyst after analyst argued that HLL would do very well as the monsoon seemed normal this time. If you wanted an example that the market is always irrational in the short run here was one. HLL has not been stagnating for three years now because of poor monsoons. It is stagnating because it cannot grow its sales without sacrificing margins. It is squeezed between high-cost operations, desire to protect margins and intense competition from spunky regional players. In 2002 HLLís share price fell by 18 per cent and it underperformed the Sensex by 21 per cent.

In three months, the stock ran up by 18 per cent and yet it still underperformed sensex by 3 per cent. Market expectations have been running high that good monsoons this year (especially after last yearís drought) will lead to booming sales for HLL.

Unfortunately, at a P/E of 25 and competitive pressures increasing, sales growth and profit growth will not be enough to drive the stock higher. Normal/good monsoons are a no solution for HLLís problems ó namely, poor incremental demand, competitive pressures and lack of major growth drivers in its portfolio of products. As I have said several times, HLL has no pricing power. Can it increase the price of Lux or Clinic and hope to sell more' Some savvy investors obviously looked at these issues and decided to exit.

Where is the broader market headed' Most probably down but we will know next week depending on how the fight to take out 3600 resolves. I expect the sensex to make another attempt to cross 3680-3690 area next week, possibly on Monday. It may end in disappointment unless Reliance makes another move up towards 350. Almost all old economy stocks like Grasim, L&T, Mahindra & Mahindra, Telco are still in an upward trend. After the results season is over, I wonder what would keep the market up. I would advise sell the rallies. If 3600 breaks, the fall could be steep. The odds are high.

Movement of Indices

       Sensex       BSE 200       BSE 500       S&P CNX Nifty       S&P CNX 500

One year ago       3245.74       393.30       1183.02       1041.30       773.65

One month ago       3431.03       431.64       1308.54       1081.95       856.40

One week ago       3676.26       461.52       1404.80       1161.65       915.50

July 14       3720.75       466.24       1420.24       1171.50       924.70

July 15       3686.34       461.59       1404.97       1159.85       915.00

July 16       3721.65       467.06       1423.19       1168.75       926.55

July 17       3668.91       459.73       1400.51       1152.00       914.00

July 18       3647.58       455.92       1389.16       1140.00       904.30

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