The markets, despite showing very high volatility in the recent past, have remained almost at the same level even after three months when the Nifty breached the 4,600 mark in early June in the post-election scenario with the formation of a stable government. However, post-Budget the markets nosedived to breach a level of 4,000 but soon regained to touch the new high in early August. The market has not been able to take a decisive course for quite some time now. The reasons are not too far to seek with equally strong positives and negatives stacked against each other.
The stable government has initiated the process of reforms starting with disinvestments, announcement of a liberal direct tax code and the likelihood of goods and services tax to be introduced soon. The rise in index of industrial production (IIP) by 7.8 per cent has been the highest in the last 16 months, beating the forecasts by a wide margin, and was substantially higher compared with the growth rate of just 2 per cent in May and 0.4 per cent in April this year. This has been possible due to the stimulus spending by the government and higher salaries of government employees that boosted consumer demand.
But the impact of the drought may start showing in the manufacturing demand nearing the harvest time of end-September and early October. The monsoon has been about 30 per cent below normal and, if the weather forecasts are to be believed, even the rabi or winter crop could be hit. This has triggered a sharp rise in food prices and it is feared that this will raise the inflation rate to about 6 per cent by the end of this fiscal as against the earlier forecasts of 4 per cent. Due to this, the growth rate of Private Final Consumption Expenditure (PFCE), which has fallen to 2.9 per cent in 2008-09 from 8.5 per cent, is likely to be further impacted.
The situation abroad has some redeeming features with the US Federal Reserve saying that the US economy is “levelling out”. Although economic activity is likely to remain weak for the time, the policy actions to stabilize the financial markets and institutions with fiscal and monetary stimulus will make the market forces contribute to a gradual resumption of sustainable economic growth with price stability. Weak recovery and loose monetary policy can therefore prove to be an ideal combination for high liquidity and rising risk appetite to support various asset classes, especially equities. Chinese markets, however, remain a matter of concern.
Back home, investors see little reason for stock prices to appreciate further after having risen almost 90 per cent in five months when the global economy, mainly US, still remains uncertain. The recent rush by promoters to sell stakes through public offers and private placements lends credence to this theory. The June quarter performance of the corporate sector has been encouraging, mainly due to falling raw material costs and lower operating expenses. The corporate sector has to register a robust growth in revenues and profits to justify the present valuations with the Nifty trading around 20 times the EPS of the trailing four quarters. This is about 25 per cent higher than its 10-year average valuation of around 16 times.
The earnings outlook is far from rosy with rural demand, robust so far, also likely to come under pressure due to the failing monsoon and high food inflation
However, the earnings outlook is far from rosy with rural demand, robust so far, also likely to come under pressure due to the failing monsoon and high food inflation. Investors are therefore advised to use caution in the short- to medium-term and buy only selectively with a long-term perspective. The ample liquidity in the system may continue to guard against any sharp downside.
Navin Flourine
(CMP Rs 243)
The company has been operating the largest integrated fluorochemical plant in India since 1967. There are three segments to its business – specialty fluorochemicals, bulk fluoride and refrigerants mainly used by agrochemical, pharmaceutical, petrochemical, personal care, metals and refrigeration industry. All these are high-growth industries and top MNCs are its clients. The company continues to get large carbon credits for phasing out CFC under the Kyoto Protocol for which it is implementing a clean development mechanism project entitling it to receive 2.8 m carbon credits annually, assuring a certain amount of cash flow for the next 10 years. Assuming an average price of $12, the annual inflow would be Rs 161 crore, translating into pre-tax Rs 159 per share. Huge free cash, zero debt and higher dividends (with a dividend yield of around 5 per cent) puts the company on a strong foothold. With a likely PBT of Rs 150-160 crore against the market cap of slightly over Rs 200 crore, the stock could witness a re-rating with every quarter of good performance and possibility of buy back. Expectation of substantial recovery of dues from the group company, Mafatlal Industries and valuable property at Mafatlal Centre, Nariman Point could be further triggers. Accumulate the stock for 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.
