So who’s driven the 15% rise in the National Stock Exchange’s Nifty in the past two months? According to data published by the Securities and Exchange Board of India (Sebi), foreign institutional investors (FIIs) have been net buyers worth Rs2,542 crore in the cash segment since 18 March. The Nifty closed at this year’s low of 4,503 points on 17 March, and has steadily risen since, recovering more than a third of its losses in the January-March correction.
But cash market trades don’t reveal the complete picture of FII positions in the country, since these investors are very active in the derivatives segment as well. During the same period, FIIs took net long positions worth Rs5,778 crore in the stock and index futures segments. Putting both the cash and derivatives segments together, they’ve taken long positions of over Rs8,300 crore.
But most of the long positions were made in the second half of March, when the markets had just begun their recovery. About 95% of the net cash market purchases in the past two months were made in the second half of March. In the derivatives segments, two-thirds of the net long positions were made in the last two weeks of March.
Of late, however, foreign institutional investors are going slow with investments in India. This month, they’ve been net sellers worth Rs444 crore in the cash segment, and have taken net short positions worth Rs1,311 crore in the derivatives segment. This is partly because of the sharp depreciation in the rupee in recent days, which cuts down return expectations in dollar terms.
Meanwhile, a recent report by Citigroup (quoting data by EPFR Global) says foreign funds targeted at the Indian market received net inflows of $214 million (Rs914 crore) in the week between 30 April and 7 May. In the preceding three weeks, net inflows averaged $146 million. This seems to contradict FII data published by Sebi, which reveals net sales in recent days, but note that the EPFR Global data doesn’t cover the entire universe of FIIs, and in any case the net purchase amounts reported by them are not very high. Mutual funds have been net sellers in the past two months, according to Sebi data, with sales of Rs1,207 crore in the cash segment. But data published by the Bombay Stock Exchange on net purchases by domestic institutional investors, which includes mutual funds, insurance companies and banks, shows large amounts of purchases. They’ve made net purchases of about Rs3,000 crore in each of the past three months. That fits in well with anecdotal evidence of insurance companies being the new 500-pound gorilla in this market.
Price controls might hurt SAIL’s latest lustre
The state-owned Steel Authority of India Ltd (SAIL) reported impressive March quarter results, sending its shares up 8% on Friday. Net sales rose by 29.8%, much higher than the 11% rise in the preceding three quarters.
But then, revenues are usually high in the fourth quarter for the company. What was really impressive was the 15.7% increase in average realizations and the 590 basis points improvement in operating margin last quarter. The operating profit margin has been arrived at after deducting an exceptional provision for staff cost increases made by the company effective 1 January 2007. For the whole year, operating profit rose by 41.5% on the back of a much lower 16.7% increase in sales. While the company benefited from better realizations, it also saved on costs through lower energy consumption, and a drop in the average rate for coking coal. Labour productivity increased as a result of a decrease in manpower and capacity utilization was well over 100%.
The twin blow of the government’s pressure on pricing and the huge jump in raw material costs is hardly reflected in the March quarter results. However, the main impact of government pressure on pricing started this fiscal. And while the company’s share price has corrected to reflect this, analysts are concerned that there may be further downside in store if the curb on steel price increases continues for more than the current prescribed period of three months.
Long-term contracts for iron ore are being signed at prices that are 65% higher than year-ago levels, but SAIL is insulated to a large extent because it owns captive ore mines. But the company imports coking coal, prices of which have risen by about 200%. Margins are set to decline in the face of increasing costs and the inability to raise prices. Unlike Tata Steel Ltd, the bulk of whose sales now come from the overseas market, SAIL’s revenues are predominantly from the domestic market. Besides, it doesn’t enjoy the benefit of captive coal resources like Tata Steel. It’s no wonder SAIL shares have given up some of their past outperformance in recent times (See chart), reflecting the fact that it will be hit much more from the government’s interference in pricing than Tata Steel.
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