Nifty UP by 3.5%, February Series starts with a Bang

Last week, a lot of news has been absorbed by the Indian markets, like the RBI anouncement, Fed rate cuts, results posted by companies but the new month has begun with a positive note, the Nifty closing 3.5% higher today. Analysing the current trends, volumes and behaviour of the markets, there are lot of interesting observations to make:

• Surprisingly, IT stocks which were non-performers for a long period lead the rally with CNX IT index up by 6.15%, Infosys was up by 6.37%. The results of IT companies have been average; Infosys net profits for the quarter ending December 2007 grew by 23.8%. When stocks of IT companies were on the rise, P/E ratio of this industry was around 35. I have never seen Infosys quoting a P/E below 25. In the past year, fundamentally good stocks like Infosys have been beaten such that now it is quoting at a modest P/E of 22. This sector currently possesses risks as it is highly dependent on the US economy and it deals with exports and maintenance of software. It was encouraging to see companies like Microsoft and Google still posting excellent results, probably indicating that there is still a lot in offer for other companies too. Keeping in mind the current valuations and growth of this sector, I would now 'BUY' IT stocks, but one should not expect anything more than just modest returns.
• The CNX Midcap closed flat with stocks like Punj Lloyd still getting beaten up by 9%. In the past year, lot of these companies have had a dream run and they were now expected to post decent results. The numbers posted by a lot of Small and Mid cap companies were below expectations and many of them even reporting losses in this quarter. After a massive correction, investors generally bank on large cap companies backed by strong fundamentals and now with the performance of Mid cap being poor does not help the confidence. A lot of selective buying was happening with a few stocks like 'Hotel Leela' up by 14%; they apparently reported a net profit of 54% for quarter ending December 2007. This stock almost corrected upto 45% and now looking at the valuations looks to be a good 'BUY' at these levels.
• Nifty Feb futures closed at a premium of about 6 points, being the most actively traded contract. Also interestingly 38324 call contracts of Nifty of strike price 6050 were traded. The statistics on the derivatives front clearly indicate a positive sentiment. Apart from the Nifty and the entire Reliance pack, the only other actively traded contract was ICICI Bank.
• There is one stock which needs special mention because it has been least impacted by all the corrections and is still trading strong near its 52-week high and thats HDFC. It has just announced a reduction of 25 bps in their home loan rates and the stock was up by 5.66%.
• Future Capital had a decent listing at 1044 against its issue price of 765 and closed at 908.

The above cues do indicate a positive bias, but one needs to be cautious as a lot of uncertainities still need to unfold like the Union Budget, FII flows, liquidity factors and on the technical side crossing the 5400+ barrier. I will be closely tracking these happenings and keep you all posted.