Despite the global economic recovery not giving a clear signal, the trend in Indian equities has largely remained positive due to the abundant liquidity in the system. The weakness in the dollar is considered to be a major factor behind the relentless rise in equity valuations though, of late, an increasing number of analysts has started contesting the opinion that the markets have been ignoring fundamentals. More important is the fact that equities may see this trend continuing for some more time while the dollar continues its downward journey. However, the latest industrial data has lent some credence to the upsurge in equities besides the strong growth recorded in sale of cars and the sharp upward move in the Baltic Dry Index that tracks shipping movements.
The analysts have started feeling that the valuations now are a bit stretched and the markets need to consolidate the gains made in recent months. They are therefore advising investors to tread cautiously for the short to medium term. According to them, the market capitalization to gross domestic product (GDP) ratio – an indication of how risky the markets are – has indeed started pointing to this. At current market capitalization, the ratio is almost 100 per cent – the high it crossed only during the peak of the boom in 2007-08. This indicates that the returns in future from the present levels may be limited. Also, conditions in days to come will be far less favourable than what the markets have experienced in the recent past.
During the past nine months, liquidity has been good, interest rates low, stimulus packages were unleashed by most governments across the world, including in India, and inflation remained at the sub-zero level. The situation is likely to reverse in days to come with governments on their way to withdrawing the stimulus packages, inflation rising rapidly and easy money policy being slowed by the central banks. The markets have already discounted the good corporate numbers for the September quarter.
While the markets have run up considerably, conditions are less favourable for a sustained boom. Though FIIs and domestic financial institutions, especially insurance companies, have infused big money into the markets, the valuations may compel a slowing down of further flows
Though the RBI survey is upbeat on corporate profits for the financial year 2009-10, a detailed analysis of the September quarter results reveals a different story. The growth in net profit of manufacturing companies forming part of the BSE 500 Index in the September quarter stood at 54.45 per cent. But this has been mainly driven by lower raw material cost and lower interest outgo. Had there been no change in raw material prices and interest costs compared to the previous year, this would have been just 8.3 per cent. Sales have to pick up fast if the corporate sector has to maintain growth in profits. With commodity prices, including of crude, rising and the RBI already indicating reversal of its easy money stance by withdrawing some of the special liquidity measures and imposing tighter norms for realty sector lending, things may not remain so rosy for the corporate sector.
In a nutshell, while the markets have run up considerably, conditions are less favourable for a sustained boom. Though FIIs and domestic financial institutions, especially insurance companies, have infused big money into the markets, the valuations may compel a slowing down of further flows. In fact, the fund flows have already started slowing. In the first quarter of this year, there was an outflow of $1.5 billion. The second quarter saw inflows of $6.4 billion and third quarter of $7.4 billion. It has slowed to $2.4 billion in the current quarter. The dollar pull-back may be a major worry for the markets since an increasing number of investors has started viewing the US dollar as the most undervalued currency.
Small investors are advised to be cautious and may, in fact, book some profits so long as the good run continues.
Amar Remedies
(CMP Rs 39)
The company manufactures vegetarian ayurvedic oral and healthcare products in India under the AMAR brand name. Its products include toothpaste, toothpowder, shampoo, creams, lotions, shaving gel, and balms and pain-relieving ointment. AMAR has manufacturing facilities in Surat, Daman and Dehradun with FDA approval for 25 ayurvedic and herbal products. It has an ISO 9001:2000 certificate of compliance from International Certification Services (Asia) for its quality management system and has won the International Star Award for quality in Paris. Various products of AMAR are exported to 10 countries from Europe through the Middle East and Asia to the Far East.
At current market price the stock discounts the EPS of Rs10.35 by a PE of only 3.84 which is abysmally low for a pure FMCG play. The stock appears to be very safe with the company having zero debt and a solid book value of about Rs 59. With consumers’ increasing preference for herbal products and the promoters making a preferential allotment, the stock is in for a re-rating.
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.
