The sharp rise in the Sensex has brought back fear; investors have started wondering if the markets are nearing a bubble zone. It is said that though the markets have started looking expensive, the continued inflows are being driven more by a desire to avoid underperformance than firm conviction in the fundamentals. Contrary to this, despite the rich valuations compared to the rest of the world, the Indian growth story appears more secure than in many other countries. The earnings growth and GDP are strong enough to sustain the valuations and attract abundant liquidity in a world ready to chase a few growth stories due to abysmally low returns on deposits.
The Prime Minister’s Economic Advisory Council has projected GDP growth at 6.5 per cent for 2009-10. The growth has been scaled up due to strong recovery in the industrial sector with expectations of decline in agriculture output. The Council has also raised concerns about inflation and fiscal deficit with inflation seen to be rising to 6 per cent by March-end and consolidated fiscal deficit expected to cross 10 per cent for 2009-10. But it says that the improving trend is unlikely to prompt any immediate withdrawal of stimulus measures or tightening of monetary policy and the accommodative monetary policy may continue at least till March 2010.
Looking to the improved risk appetite and increased capital flows, the Indian market may continue to do well. The domestic demand-driven economic expansion and emergence of strong domestic institutional investors give a further edge to the country. Though retail investors are yet to totally return to the markets, FIIs have been furiously buying in India. The fact that big investments are likely to be made by insurance companies may further extend the current bull run. The Q2 performance of the corporate sector has reaffirmed the growth story being firmly in place. But the fact that the corporate sector has planned to raise a huge amount of funds from the capital market may suck substantial liquidity, making the markets correct.
The fact that the corporate sector has planned to raise a huge amount of funds from the capital market may suck substantial liquidity, making the markets correct
The Indian markets have developed a tendency to move in tandem with other markets around the world. If the global recovery is not as strong as anticipated, it can lead to a big sell-off across the markets in the short term. Any sign of nervousness due to, say, US economic data may create a lot of volatility in markets across the world. Also, large economies such as the US and UK will ultimately have to adjust to a savings-oriented scenario from the present consumption-led one. This could have further repercussions for emerging markets, especially through exports.
Sharp rallies in the first year of recovery are typically followed by almost horizontal movement in stocks for quite some time. Since the markets have gone up too much too soon and too fast, it is high time they correct or at least take a breather. Since India is likely to report very high earnings for 2009 as against most other countries, more capital may be seen to be flowing its way. In late September, inflows into Indian equity funds hit a nine-week high. MSCI India has done far better than the average in the last quarter by rising almost 10 per cent. But the improvement in business conditions in the developed countries may make the flow of these funds dwindle, making the liquidity-driven rally in equities slow down.
Investors are advised not to track the direction of the market while picking stocks. A rally in small and mid cap stocks hitherto beaten down during the crisis may happen in view of the excellent Q2 results produced by many of them. Any correction whatsoever is not likely to be as severe as that of 2008.
Apar Industries
(CMP Rs 160)
The company is the market leader in transformer oils with over 55 per cent market share in India under the brand POWEROIL with domestic customers such as BHEL, Emco, Crompton Greaves, Bharat Bijlee and Alstom. It is the second largest manufacturer of conductors in India with around 25 per cent market share after Sterlite Technologies. Apar is also the largest exporter of conductors from India and exports to over 43 countries.
Power transformers account for around 70 per cent of the transformers market and is likely to see a huge demand due to massive increase in capex expected in the power transmission sector. The company’s profitability was adversely affected due to forex losses in the recent past. However, since all the losses are already accounted for and the demand for the company’s products is almost inelastic, things should improve remarkably in coming days. At a CMP of Rs160, the stock trades at around 8x and 6x its FY2010 and 2011estimated earnings. Volatility in foreign exchange and raw material prices remain major areas of concern for the company.
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.
