The defaults in sub-prime mortgages and related securities in the US had a considerable impact on the global liquidity scenario. This could have resulted in a major crash in the stock markets, if not for the intervention by central banks, including the Federal Reserve, which not only pumped in billions of dollars but also softened interest rates. Though the situation appears to have been managed for the time being, the problem is likely to persist for a while. Moreover, the crisis has made lenders more restrictive, thereby making credit more expensive even for quality borrowers. Real estate prices are expected to decline further, with lenders selling the houses held as collateral. All these developments may create further uncertainties for interest rates, exchange rates, inflation and growth in general due to the impact it will have on consumer spending and export demand in the US.
Though the Indian economy is performing well and is expected to grow at a healthy rate of around 9 per cent, and our equity markets are likely to reflect this in the long run, globalization and increasing integra tion with international markets have led to Indian markets feeling the tremors of what happens abroad. Equities have fallen sharply as the global exposure of domestic stock markets is relatively much higher than the economy as a whole or the other key financial markets such as debt. This has happened due to two reasons. First, to expand their operations, Indian companies have increased their trade links abroad.
They have been acquiring companies and borrowing actively overseas. Second, there has emerged a very large class of global institutions and funds that are active play ers in stocks, bonds and currencies across the world. They play a key role in stock market movements in a country like India. FIIs have pumped in nearly $60 billion (over Rs 2.5 lakh crore) in Indian equities so far and are major stakeholders in Indian companies. Since they look for best invest ment opportunities worldwide, any change in interest rates or stock prices at any of the major global markets has a bearing on their investment decisions for India. The FIIs are unlikely to withdraw in a hurry. Nevertheless, the Indian stock market – to resume its upward journey – needs contin ued flow of liquidity. And recent global events can definitely
interrupt these liquidity flows due to direct or indirect exposure of various FIIs, hedge funds and the like to mortgage securities in the US markets. Also, the domestic concerns of slowdown, strong rupee, interest rate, infla tion and political uncertainty can further aggravate the situation.
The latest downturn in Indian equities may, therefore, last for some time. But it still provides a good opportunity for long-term investors to take selective exposure and churn their portfolios. The rising savings coupled with low equity ownership of Indian households has significant potential. The percentage of savings to GDP is forecast to rise from 30 per cent in 2007 to 33 per cent by 2011. The proportion of financial savings within overall savings will rise from 17.3 per cent of GDP to 20 per cent during the same period. Investment in equities, mutual funds and debentures will rise from 3.8 per cent of financial savings to 15 per cent by 2011. This will provide a cushion for FII investments which in itself is likely to witness a quantum jump from $13.9 billion in 2007 to $64.9 billion by 2011 due to the relative attractiveness of the Indian market.
Indraprastha Gas Ltd. (CMPRs 109)
THE market, throughout the entire bull run, seems to have ignored a company that combines low risk with high growth prospects. IGL supplies compressed natural gas through a network of more than 150 gas stations across Delhi. The company also has a growing market for its piped natural gas and isexpanding its operations in the National Capital Region. Its sourcing of natural gas at administered prices from GAIL and virtual monopoly in the Delhi market presents an effective entry barrier for competition. Practically no debt on its balance sheet coupled with pricing power to pass on any increase to its customers has seen the operating margins improve steadily. With assured volume growth, likely to accelerate in view of the 2010 Commonwealth Games, IGL’s prospects appear bright.
Agro Dutch Industries Ltd (CMPRs 26)
ADILhas emerged the dominant player in India for mushroom exports, producing 49,000 of the total 90,000 tonnes of the country’s produce. The firm has a captive power plant and a manufacturing unit which provides a significant cost advantage. For 2006-07, it reported a net profit of Rs 18.17 crore on a turnover of Rs 205 crore, showing growth in sale of 45 per cent and in net profit by 50 per cent. For the quarter ending June 2007, it earned a net profit of Rs 8.8 crore – giving an EPS of Rs 2.89 on sales of Rs 55 crore as against the net profit of Rs 4 crore (EPS Rs.1.37) on sales revenue of Rs 52.7 crore for the same period last year. Besides large export orders, the company’s business is likely to witness heightened growth due to entry of big corporates into organized retailing such as Reliance Fresh, Big Apple, Subhiksha, Bharti and so on. The stock will give hand some returns in six months to one year
