How the Sensex swung through 2006

2006 was a rocking year for the stock markets. And a rocky one too! Not only did the Sensex show a whopping jump of 47%, it also demonstrated the greatest volatility in the past five years.

An ETIG analysis reveals that the annualised volatility coefficient (AVC) of the Sensex stood at 26% for 2006, compared to 17% and 25% during 2005 and 2004 respectively. The benchmark index was significantly less fluctuating in 2003 and 2002 also, with AVC of 19% and 17% respectively.

The bourses witnessed sharp see-saw movements during the year, with a continuos upward movement from January to May, a sudden crash from May to June and then again, a strong recovery continuing throughout December. On one hand, the Sensex touched an all-time high of 14000, while on the other hand, it also witnessed its single largest-ever fall in one trading day since 1991. With Indian markets getting more globally aligned, this year witnessed sharper reactions to global macro-economic changes and domestic policy measures.

Annualised volatility indicates the amount of fluctuations in the market movements during the year. The higher the volatility, the riskier it is to invest in the short term. The annual volatility is calculated by taking the standard deviation of daily returns for either the stock or the index and then annualising it over the total number of trading days during the year.

Among the Sensex stocks, Infosys and TCS were the least volatile with AVC of 31% and 32% respectively. Reliance Communications, during its 10-month stint on the bourses, exhibited the maximum volatility of 82% since listing. Tata Steel, in news for its Corus bid, was the next most volatile stock with a coefficient of 48%, followed by Hindalco and Reliance Industries at 43% each.

Twenty-five out of the BSE 100 stocks reported AVC of more than 50%, with United Spirits topping the chart with 83%. Asian Paints was the only stock to move in sync with the Sensex, with an AVC of 27%, while Sun Pharma was slightly worse off at 29%. Smaller companies were even more unpredictable during the year, with the BSE Small-Cap and BSE Mid-Cap indices reporting AVC of 28% and 27% respectively.

On the sectoral front, the metal sector was the most fluctuating of all with an AVC of 41%, while the healthcare sector was the least volatile with a coefficient of just 24% during the year.

Sensex breaches all time high, closes @ 14,015

Sensex closed at an all time high at 14,014.92 after a choppy session on Wednesday, as buying interest resumed for index pivotals at lower level. The market witnessed a sharp rally in the first two trading session of calendar year 2007. At closing, Sensex was up 72.68 points or 0.52% at 14,014.92.

The BSE Sensex struck an all time high of 14035.67 in mid afternoon trade surpassing its previous all time high of 14,035.30, which it had struck on 6 December 2006. The Nifty closed at 4,024.05, up 16.65 points. The market staged a smart recovery in the second half of the day's trading session, after slipping to an intra-day low of 13,897.42 in mid-morning trade.

The market-breadth was strong, as buying continued for small-cap and mid-cap stocks. For 1,695 shares advancing on BSE, 933 declined. Just 64 shares were unchanged. The BSE clocked a turnover of Rs 4,286 crore as compared to Rs 3381 crore on Tuesday (2 January). Among the 30-Sensex pack, 21 advanced while the rest declined. In NSE, there were 619 advances and 379 declines.

BUY - Marico Industries Ltd.

CMP: BSE – Rs 547.25 / NSE – Rs 546.05
Target price: NA

• Marico Limited (ML) is into manufacturing of consumer products such as coconut oil, other edible oils, hair oils, fabric care products, hair creams and processed foods. It has made its second acquisition in the Egyptian market by acquiring a hair-care brand, Hair Code.
• The Hair Code acquisition increases its market share to 50 per cent of the Egyptian pre and post wash hair care market. The pre and post wash hair care market in Egypt is growing at about 6.5 per cent per annum. Sales of Hair Code are expected at Rs 35 crore and profit after tax margin of 18 to 20 per cent.
• The acquisitions between Fiancee and Hair Care are estimated to contribute about 4.5 to 5 per cent to sales and about 7 per cent of operating profits during FY08. The acquisition could also act as a platform to promote its Indian-made products in these markets due to access to the distribution network and a better understanding of the markets.
• At the CMP of Rs 540, the stock trades at 24.5x FY07E earnings and 20.6x FY08E earnings.

BUY - Deepak Fertilizers And Petrochemicals

CMP: BSE – Rs 87.75 / NSE – Rs 87.50
Target price: Rs 120.00

• Deepak Fertilisers and Petrochemicals Corporation Limited (DFPCL), manufactures anhydrous liquid ammonia. A consistent supply of its crucial raw materials, like natural gas, is assured through DFPCL’s own gas pipeline, direct from Bombay High gas fields.
• DFPL is the only domestic producer of isopropyl alcohol (IPA). IPA will significantly add to the revenues and is likely to contribute around 20 per cent of FY09 revenues.
• DFPL has been adding to its industrial chemicals portfolio consistently, and today it has a wide range of products that share the same production processes or raw materials. At present, the agriculture inputs business of DFPCL contributes around 30 per cent of its net revenues.
• DFPL currently holds a domestic market share of around 35 per cent. At the current market price, the stock is trading at a P/E of 8.1x and 6.1x and EV/EBITDA of 3.8x and 2.8x its FY07 and FY08 earnings, respectively.
• I initiate coverage with a Buy rating and a target price of Rs 120.

BUY - Essel Propack Ltd.

CMP: BSE – Rs 78.20 / NSE – Rs 78.55
Target price: Rs 98.00

• Essel Propack Ltd. (EPL), which was previously Essel Packaging, belongs to the Subhash Chandra group and was incorporated in 1982.
• It commenced commercial production in 1984. Today, it is recognised as a manufacturer of fully laminated tubes, co-extruded seamless tubes and laminates, in India, as well as overseas. EPL has been awarded the ISO 9002 certification for its manufacturing and marketing operations.
• I expect margin improvements in the laminated tubes, plastic and especially in packaging segments. A 30 per cent growth is expected in plastic tubes in CY07E.
• I expect revenue in the quarter of December, i.e. CY06E of Rs 3 billion and profits of Rs 312 million. At the current market price, the shares trade at 8.1x CY08E EPS.
• I recommend a ‘Buy’ on the stock with a price target of Rs 98.

BUY - Indraprastha Gas Ltd.

CMP: BSE – Rs 116.85 / NSE – Rs 116.80
Target price: Rs 162.00

• Indraprastha Gas Limited (IGL) is a joint venture of GAIL (India) Limited, Bharat Petroleum Corporation Limited and the Government of the National Capital Territory of Delhi.
• IGL was incorporated to implement the Compressed Natural Gas (CNG) expansion programme and the Piped Natural Gas (PNG) project for varied applications in the domestic and commercial sector. DTC buses, taxis and auto rickshaws, generate approximately 92 per cent of the revenues for the CNG segment of IGL.
• We expect the company to witness a CAGR of 12.8 per cent in revenues from sale of CNG between FY06-FY09. Due to increasing awareness about PNG and its advantages over LPG, the demand for it is increasing and the revenues expected from the sale of PNG show a CAGR of 51.9 per cent during FY06-FY09.
• The stock trades at 12 times its one year forward earnings or 6 times EV/EBIDTA.
• I recommend you buy the stock with a price target of Rs 162.

BUY - Asian Paints Limited

CMP: BSE – Rs 725.80 / NSE – Rs 725.30
Target price: NA

• Asian Paints Ltd (APL) is India’s largest paint company and ranks among the top ten decorative coatings companies in the world. We expect the paints industry to grow at a CAGR of 12 to 14 per cent over the next three years, as against 9 per cent in the past few years.
• I also expect a 20 per cent growth in automotive paints, which accounts for 45 per cent of the demand for industrial paints. APL expects its revenues to grow at a CAGR of 19 per cent over FY06-09E.
• Its EBITDA margin is expected to increase from 13 per cent in FY06 to 14.7 per cent in FY09. We expect the EPS to grow at a CAGR of 26 per cent over FY06-09E and a 19 per cent growth in revenues.
• At the CMP, APL trades at 25.1x its FY07E earnings and 20.1x its FY08E earnings. The EV/EBITDA for the stock is 14.8x and 11.9x on FY07E and FY08E, respectively.
• I initiate coverage on the stock with a ‘Buy’ recommendation.