The benchmark indices are about to kiss record levels and the markets might get extremely choppy. Retail investors, whose participation has already gone down substantially recently, are likely to feel more uneasy and would like to book profits at every rise. Moreover, investors can earn more than 9 per cent on their money by simply keeping it in fixed deposits in banks. Thus, they have less incentive to take risks in the stock market whose valuations already appear a bit stretched. The impact of a strong rupee and rising interest rates could get reflected in corporate earnings of the next two quarters.
The slowing rate of growth in net sales and profits of the corporate sector is already evident if one compares the January-March quarter with the preceding quarter, October-December 2006-07. More than 1,000 companies declaring their quarterly results for January-March 2006-07 registered a growth in net sales and net profit at 32 per cent and 47 per cent, respectively. Compared with the previous quarter’s (October-December 2006-07) performance of 38 per cent and 61 per cent, respectively, this indicates a probable slowdown in corporate growth rate.
A recent RBI survey also expects a dip in business expectations for the April-June quarter as fewer firms are expected to show a rise in profit margin, production and working capital. Another survey by FICCI also presents a less encouraging outlook on investments and exports for the six months ending June 2007. The survey lists increase in prices of capital goods and rising cost of credit and other inputs as mainly responsible for this. These very reasons could ultimately adversely affect the retail consumer demand for consumer durables as well.
Mega issues such as DLF (which SEBI cleared despite a number of investors’ grievances pending), ICICI Bank, SBI, Omaxe, Power Grid Corporation and Oil India that are slated to hit the market in the near future can also make investors book profits to accommodate them. Moreover, these issues will suck a lot of liquidity from the markets which will ultimately get reflected in the valuations. Unless there is a very strong flow of resources from the FIIs, the markets are likely to remain under pressure for quite some time.
Hotels loom large
The yearahead is likely to belong to the hospitality industry. Hotel stocks are in for a re-rating, riding on high occupancy and revised tariffs which are likely to get reflected in their bottom lines. Also, the replacement cost per hotel room is widely believed to have skyrocketed. Investors are therefore advised to grab any good hotel stock. Some of the promising bets in the sector include East India Hotels, EIH Associates, Asian Hotel, Gujarat Hotel, Taj GVK and Indian Hotels.
Bhilwara Spinners – CMP Rs 12-13
A textile company of the LNJ Bhilwara Group (HEG, RSWM, BSL Ltd, Maral Overseas), Bhilwara Spinners, though, has nothing to write about so far as the current financial performance is concerned. The company has been in restructuring mode and recently sold half of its 88 acres for Rs 22 crore. The remainder is slated to be developed for residential-cum-commercial use. With an estimated price of Rs 1,000 per square foot prevailing for similarly located properties, the intrinsic value comes to Rs 120 per share. The company has already started the process of shifting its plants to another location. At the current market price of Rs 12-13, there is hardly any downside risk. However, the value unlocking may take some time. Investors can accumulate the stock with a time horizon of one to two years.
