THE rally appears to have stretched a bit too far and this probably is the time for investors to review their portfolios. Two things that are likely to decide the way markets will behave in the coming six months are the general election in the country and the way tapering by the Fed or for that matter by any other major central bank in the world shape up. Those who are yet to enter the markets will do well to wait for a correction that may be round the corner.
It may be naive to believe that the political change in 2014 will give a clear mandate to any one political group and that the winning group will begin to further the reform agenda as soon as it comes to power. Even if it is assumed that there is a clear mandate, the winning party will not have a magic wand that will enable it to take quick decisions and implement key reform measures. Investors will do well to refresh their memories of what happened to those who bet big on UPA II, with Dr Manmohan Singh as PM, coming back to power in 2009. Interestingly, it is those very investors who every day read the disclaimer issued by fund houses that say ‘past performance is no indication for the future’ and commit the same mistake by relying on the sentiment that ‘this time it’s different’.
If history is any guide, most of the big-ticket reforms take an average of 5-10 years to get implemented and see their impact translated into any meaningful change at the ground level. The Companies Bill, Goods & Service Tax, and so on that has not been able to become reality are but a few examples. Even the reforms that we are living with today such as those related to power, banking, insurance, and the like, have taken time to make their impact felt. So, those hedging their bets on the election outcome may do well to book some profits now and re-enter later.
BGR Energy Systems (CMP Rs. 125)
The company, headquartered at Chennai, operates in the utility industry, offering services ranging from product manufacturing to project execution. It reported a standalone sales turnover of Rs. 826.28 crore and a net profit of Rs. 35.07 crore for the quarter ended September 2013 as against the sales turnover of Rs. 627.26 crore and net profit of Rs. 34.73 crore for the quarter ended September 2012. It has bagged some very high value contracts recently and has a healthy order book position with a reasonably good track record of implementation. The CMP is just .75 times of the book value and discounts the TTM EPS of Rs. 23.24 by a PE of just 5.43 times. The company declared a dividend of 70 per cent, giving a healthy dividend yield of 5.55 per cent on the CMP. Given the current focus of the government on giving speedy clearance to projects, the power sector as such may be in for some exciting times ahead. With the current fundamentals, the stock hardly has any downside and may give decent returns with a time horizon of two years.
Recovery in the US being the engine of global growth, will impact most of the markets favourably though faster than expected recovery may spark fears of diversion of foreign inflows from emerging markets. However, most analysts believe that India is much better prepared to face the tapering given the swift and sharp compression in CAD and growth showing signs of revival, though inflation, fiscal deficit, rupee and interest rates remain major concerns. It is worth noting that FIIs bought equities worth $19 billion till date during the calendar year 2013 and have continued their buying spree despite the Fed’s tapering announcement that sparked fear of a sudden withdrawal from the Indian market. FIIs are actually taking a long-term call on the Indian market.
Meanwhile, the RBI’s decision to leave the rates unchanged were widely welcomed by the markets in the backdrop of its effectiveness to curb inflation, especially food inflation that is more due to supply side constraints, and the fact that rate hikes have caused immense damage to the investment climate. Corporate results for the December quarter are expected to be better though high foreign debt, especially in the short term, continues to be a worrying factor. The markets are likely to witness heightened volatility that may keep investors on their toes.
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