The markets were on their way upwards and comfortably crossed the 10,000 mark. Then came the sudden end to the rise – in fact, crash-like conditions were witnessed. My understanding, when I predicted it, was based on the fact that the markets may not be able to fully discount the unknown factors such as Nortel and Satyam. Such incidents, though widely reported by the media as one-off incidents, may not turn out to be so and many more Satyams are waiting to happen not only in India but the world over. Such incidents occur more when the going gets tough and manipulations are hard due to the all-round liquidity crunch. Companies dealing in invisibles are more prone to this kind of lack of transparency, making India more vulnerable since services and such invisibles are the main forex grosser for the country. We have started hearing about Educomp – again a service provider in the education domain.
The market crash and the Satyam episode have compelled all investment analysts to rethink the way they analysed stocks till date. These two events have possibly thrown most of the investment analysis techniques followed by the leading investment analysts into a garbage bin. The basics of investment analysis have again come to the fore. Investors need to give maximum weightage to the quality of management and the corporate governance practices, including the quality of financial information reported by the companies. This no doubt leaves the investors with a very restricted choice for the quality of corporate governance practices followed by even some of the leading and most respected corporates may come under the scanner.
Coming to the market outlook, the scenario is not looking cheerful – at least in the near future and things will become worse before they start getting better. The news flow on the international front has not been all that encouraging though the domestic problems appear to be waning. The biggest banks in the world, Citibank and Bank of America, are in dire straits. The sub-prime mortgage crisis followed by excess leverage crisis and collapse of the real economy may lead to massive defaults in commercial real estate, credit cards, and corporate debt.
The US Federal Reserve is determined to prevent a general banking collapse which simply means taking over massive bad debts of the financial sector that may have far-reaching unintended consequences for the entire world. The deleveraging process as it sets in motion is further likely to compound the problems, especially for India since it may witness yet another and more serious bout of unwinding by FFIs. Some of the Indian banks are known to be going through tough times.
As against the dismal show by the US corporates, the Indian scenario has not been that gloomy. The quarterly results of a very large number of companies have in general been better than the market expectations. However, the net profit grew at the slowest pace in the three months ending December 31, hinting at the depth of the economic slowdown. The experts warn that the worst is yet to come… probably in the next quarter. Low inflation amid the global slowdown is not a surprise. But the monetary expansion may see a situation of deflation in the not too distant future – opening yet another serious front for the economy.
Hindustan Zinc
(CMP Rs ?)
Hindustan Zinc, the largest integrated metal producer in the country, is amongst the lowest-cost zinc producers in the world. The company has its own mines, smelting capacity and power plants. Net sales of the company more than tripled in the last three years with net profit increasing by over seven times in the same period. With falling commodity prices, the operating margins have come down but being the lowest-cost producer places the company in a far better position compared to many other international players in the field. The company is almost debt-free. It is going in for massive expansion plans, to be financed mainly by internal accruals. This will give a considerable boost to its top and bottom lines. Moreover, the company has cash and a near-cash balance almost equal to its current market capitalization.
Further downfall in commodity prices is the main risk the company runs. There are also concerns about its corporate governance practices. The stock is available at its lowest-ever PE of less than 4, based on its trailing 12 months EPS which makes it an almost risk-free buy. With the commodity prices at their lowest, one can expect them to rise considerably once the world scenario starts improving thereby giving a considerable boost to its bottom-line. Investors with 2-3 years’ time horizon can look for very decent returns.
The author is retired as Professor from the University of Delhi in 2024. He is an alumnus of IIM Indore and holds a PhD from the Delhi School of Economics. An investor activist and former member of various SEBI committees. He taught Capital Markets and Investment Banking at leading business schools of India.
