We are again witnessing massive re-leveraging of the public sector in advanced economies with all its unintended social consequences. The net effect of all this will result in a global slowdown.
I have a word of caution for those willing to join the celebrations for the Sensex’s move past 18,000. It is a situation akin to a midnight party where there is free flow of liquor but most of us (small investors) are not taking more than a couple of pegs owing to the fear that we have to drive home any moment. The massive monetary and fiscal stimulus and financial bailouts unleashed post-crisis are yet to see the de-leveraging, especially of the private sector, begin. Before this could happen, we are again witnessing massive re-leveraging of the public sector in advanced economies with all its unintended social consequences. The net effect of all this will result in a global slowdown.
The emerging markets like India, it is said, become attractive due to robust growth prospects coupled with not-so-happy conditions elsewhere. India may therefore continue to attract capital flows with financial markets continuing to head up at least in the short run. The good thing is that a majority of inflows are coming from un-leveraged long-term investors and the leverage amount of even hedge funds is also low. This considerably reduces the risk of sudden and sharp sell-offs that have amply been demonstrated in the recent past with Indian markets not dipping sharply even after the European crisis or flow of other adverse news from abroad.
A problem, however, stems from the fact that with every rise in the Sensex, the voices propagating the decoupling theory get louder and louder. There is no doubt of our economy being largely domestic-centric with unmatched economic growth despite the economic slowdown, but the same may not apply to our financial markets. The financial markets are driven more by the liquidity flows and investor sentiment with growth, corporate earnings and other such things playing only a supportive role.
Moreover, our dependence on foreign flows have increased rapidly to sustain the growth momentum thanks to our current account deficit of around 3 per cent coupled with slower growth in deposits vis-à-vis growth in demand for credit, consistently high and sticky inflation making our exports less competitive especially due to the fact that the rupee has not depreciated in tandem with the loss of competitiveness due to sustained foreign inflows. This further increases the risk to our markets since most of the leading economies such as the US, Europe, Japan and China are facing problems leading to slowdown in their economic recovery.
Hence, anything like the double dip recession or European crisis can give enough shocks to our markets with already prevailing high valuations making the risk more real. In addition, there is the slowing pace of earnings growth for corporate India in the coming quarters mainly due to cost pressures including input costs as well as those of rising depreciation and interest costs. Strict enforcement of minimum public float of 25 per cent for all listed companies can make matters worse.
Investors are therefore advised to avoid taking any long-term exposure for the time being and use the high valuations to appropriately reshuffle their portfolios in favour of the stocks of companies that drive their incomes mainly from domestic markets, are cash-rich and offer high dividend yield. At the same time, it would be apt to exit risky stocks, especially with high beta and considerable international exposure.
Piramal Glass
(CMP `103)
A group company of the Ajay Piramal-led drugs and healthcare to financial services conglomerate, Piramal Glass is Asia’s only and the world’s third largest specialty bottle exporter. The company, which makes glass packaging for pharma, perfume and specialty food and beverage sectors, returned from the brink of a bankruptcy caused by huge debt and its bleeding US unit with a combined net profit of ` 4 crore in FY2010 on net sales of ` 1,126 crore due to the turnaround in its US subsidiary. It is now aiming at a 10 per cent share of the $2.4 billion (`10,000 crore) global cosmetics and perfumery (C&P) bottle market.
Piramal Glass’s net sales increased 8 per cent in the quarter ended March 31, 2010 at ` 284 crore as compared to ` 262 crore in the same quarter last year. As a conscious effort, the company is focusing on increasing its share of the high-margin premium segment within the cosmetic and perfumery (C&P) segment. Its operating profit margins have also surged to 23 per cent from 9.6 per cent. It is also shifting capacity from the pharmaceutical division to the C&P segment to further improve profitability. Low manufacturing cost and a strong client base will help the company to further gain market share in the C&P segment. The results for the quarter ending June 2010, to be declared on July 28, will show considerably improved performance due to higher margins led by healthy growth in user industry and lowering interest costs with improved cash flows and no major capex requirements.
