Market watch: Return of the rupee sensitives

Updated on Nov 29, 2007 12:33 AM IST

In the last fortnight, the currency has shown some signs of stabilising, even depreciating against the dollar, writes Udayan Mukherjee.

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None | ByUdayan Mukherjee

Nothing moves in one direction continuously in financial markets, the rupee is no exception. In the last fortnight, the currency has shown some signs of stabilising, even depreciating against the dollar. This comes as a huge relief for policy makers and in the stock market— for many sectors which had been completely bombed out by the rupee's one way surge to 39.

Currency watchers say the dollar is oversold and ripe for at least a technical bounce, a view which supports the possibility of some more weakness in the Indian currency in the near term. However, just as pullbacks of 15-20 per cent haven't signalled the end of our equity bull market, any such correction should be seen in that context. The rupee bull market remains in place : what one could be witnessing is merely a correction. People playing for a bounce in the rupee sensitive sectors should be aware of this, as when this correction ends, whenever it does, they will be swimming against the tide again.

For the moment though, there could be an opportunity here. The most obvious play is IT where even large cap names are trading at historically low PE multiples. Midcap IT stocks, with few exceptions like Rolta, have got crunched to a PE band of between 8-12 times FY09 earnings. A trading bounce is entirely possible. It's not just IT though. Auto ancillaries should be watched closely. A stock like Sundaram Fasteners is down 58 per cent from it's 52 week high of 95, Munjal auto 64 per cent. Yes, they have had a rough ride but maybe stock prices have overcorrected. The leather exporter Mirza international is trading at 21, down sharply from it's year high of 53. Gems exporter Vaibhav Gems trades at half it's 52 week high of 320. The textiles space is littered with currency casualties : Abhishek and Alok, despite recent pullbacks, still trade around 30 per cent below year highs. Midcap pharma has been decimated. Stocks like Aurobindo pharma, JB Chemical and Matrix Labs trade at a 40 per cent discount to their 2007 highs.

Now this is not to say that all of them deserve to be bought. Just that, sometimes when stocks get into a prolonged "apathy" zone for investors, prices tend to get irrationally compressed. The rising rupee theme has played out so swiftly and visibly that it has destroyed sentiment in these sectors. If the rupee does stabilise or pull back, investors may sit up and take notice of sectors they had totally forgotten about and that may lead to some pullback. From their low bases, a 15-20 per cent pullback is entirely possible in many of these sectors. That may not bring them back into new bull orbits, yet provide some handy trades for nimble footed investors.

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