The recent recovery in the markets was backed by positive global cues coupled with better than expected quarterly results churned out by the corporate sector. Barring cement, capital goods and a few other sectors, most of the sectors including automobiles, metals, pharma and FMCG did well. Information technology and telecom sectors gave a pleasant surprise by beating market expectations.
However, the recovery was not convincing enough to lure back the small investors to placing bets. The mood remained by and large cautious since scepticism has not lessened significantly. The consolidation period therefore cannot be said to be over.
The market appears to have
factored in high inflation
and the mild deceleration
in economic growth and the
likely impact the two will
have on corporate earnings.
But investors are rather
cautious and risk-averse
Moreover, there is nothing to cheer so far as the domestic economy is concerned. The economic growth momentum is decidedly slowing with the latest estimates of GDP growth for the current year being placed at 7 to 7.5 per cent as against the earlier 8 to 8.5 per cent. Inflation is touching the 8 per cent mark and net foreign inflows have slowed considerably.
All this, coupled with rising crude prices, Pay Commission recommendations increasing subsidies and other off-Budget announcements, is likely to have a serious impact on the fiscal situation which is likely to worsen. This increases the possibility of further monetary tightening and price controls which may end up spoiling the market sentiment. Inflation, therefore, appears to be the single most important factor that may influence the market sentiment in days to come.
Given the choice between inflation and growth, especially in an election year, the government would like to sacrifice growth for controlling inflation. There are ample indications to suggest this in the recent policy measures initiated by the government including increasing CRR, reducing custom duties, levying additional export duties and curbs, persuasion and threat for price controls, banning futures in certain commodities etc. The RBI so far has desisted from announcing an interest rate hike; if and when announced it can take a heavy toll on the market.
However, if we look at the valuations, especially when compared with the market’s own history and that of its peers among emerging markets, they don’t look that stretched. The Indian market’s fall has been much sharper than other emerging or Asian markets whereas the recovery has been rather slow. The trailing PE multiple for the financial year 2007-08 has corrected from a high of some 27 times plus to a rather more reasonable looking 17 to 18 times now. On a forward basis, the sensex PE based on 2008-09 earnings is estimated at approximately 15. Though this is slightly at a premium compared to its peers, the same is justifiable for an estimated corporate earnings growth of slightly less than 20 per cent.
The market appears to have factored in high inflation and the mild deceleration in economic growth and the likely impact the two will have on corporate earnings. But investors are rather cautious and more risk-averse than willing to take an active call on the market. Everyone wants to stay with cash in expectation of a sharp fall in days to come due to impending uncertainties faced by the market including coming elections, monsoons, crude oil and movement of the rupee. Hence, the days to come can best be described as a time for the market to consolidate and then decide its future course of action.
But one thing is sure: the panic created by the sub prime crisis has receded a great deal and the only thing everyone is waiting for is for normalcy to return especially in the global context. There have indeed been sufficient hints for that too to happen; till then, a staggered and selective approach to investing is recommended for investors with a long-term perspective.
Orient Paper & Industries
(CMP Rs 41)
The company, belonging to the CK Birla Group, was incorporated in 1939 in Kolkata. It is primarily engaged in manufacture, marketing and export of paper, cement, electrical accessories including fans and knowhow services. Paper is marketed under the brand Diamond Touch, cement under Birla A and Orient Gold, and fans under Orient. The company is the second largest producer of paper and sells the largest number of fans. It is ranked among the most efficient paper manufacturers and its plant enjoys ISO 1400 certification. Its plant for Orient Cement is certified ISO 9001 14001. The company is on a major expansion drive in all its segments. The turnover of the company has steadily increased from Rs 295 crore in the first quarter of this financial year ie June 2007 to Rs 382 crore in the last quarter ie March 2008. The current market price of Rs 41 discounts the trailing 12 months’ EPS of Rs 13.55 by just 3.25 times, which is quite cheap compared with its peers. An investment in the stock is not only safe but can give reasonably good returns, especially in the present turbulent times that the markets are facing.
