Yet another milestone: the Indian stock market became the third emerging one after the Chinese and Russian markets to surpass $1 trillion (Rs 40 trillion) in value. However, whenever markets trade near previous peaks, there is a general anxiety among investors as to how long the bull run
will last. I have always argued that the long term bull market theory for the Indian markets remains intact with the kind of growth rate reported, likely growth in corporate earnings, comparative valuations and so on. But investors are keen to know what they should do in the near term. Factors that guide the market in the near future – besides liquidity flow and sentiments – are interest rates, exchange rates, figures on inflation, global markets, crude prices and now the Q1 results also.
There was concern that liquidity could create problems for the market especially in view of the measures taken by the RBI to suck liquidity and also the mega issues of DLF, ICICI and others which together are likely to mop up over Rs 20,000 crore in the IPO market, raising concerns for the secondary market. However, with the DLF and ICICI issues being through, these concerns have receded. The FIIs appear to have been pouring in money continuously.
Further rise in interest rates is unlikely since the RBI’s experiment of controlling liquidity by other means than resorting to CRR or interest rate hike has yielded effective results. It successfully sucked considerable liquidity through bond auctions which may not adversely affect the market sentiment. The RBI raised Rs 40,000 crore through government bonds and treasury bills in June.
Wholesale price-based inflation dipped to a 10-month low of 4.80 per cent, less than even the market expectation of 4.85 per cent. This is also way below the RBI’s own projection of 5 per cent for the financial year 2007-08. In the currency market, the spectacular rise of local currency since January has been arrested to an extent. For how long is unsure. But one thing is sure – the rupee may now not be heading in a single direction.
As far as global markets are concerned, the European Central Bank raised the rate of interest by a quarter per cent to 4 per cent whereas the Bank of England hiked the rate last month to 5.5 per cent. Bank of Japan kept rates unchanged. The US data on core inflation has somewhat reduced the Federal Reserve. The yield on 10-year treasury bills dropped to 5.15 per cent from the peak of 5.33 per cent in the second week of June – when it touched its highest in five years. The yield on 10-year Japanese bonds also reduced marginally. Global markets have become increasingly sensitive to bond yields and this was reflected in the handsome gains recorded by almost all the world markets. India’s economy may be isolated from global developments to some extent, but that is not the case with its stock market. Most of the major corrections in the recent past have been triggered by global factors, be it concerns of a slowdown in the US economy, jitters in the Chinese stock market and so on.
All this, with some other positives such as GDP growth of 9.4 per cent in the fiscal year 2006-07 and growth in industrial production of 13.6 per cent in April (far more than the 11.4 per cent forecast) has to an extent killed fears in the market. By the time you read this, the June quarter results will start pouring in. Judging by primary indicators such as advance tax collections, most companies are reporting a significant increase in payment over the corresponding period last year (notably SBI, RIL, ICICI–the leading index stocks). This reaffirms that the performance of Indian firms in the first quarter looks promising–contrary to what most analysts believed in view of the likely impact of monetary tightening on corporate bottom-lines.
However, auto, textile, real estate and some of the IT companies may register a decline in figures – but that should have only marginal impact. Growth now is driven more by capital expenditure than by consumption. Corporate balance sheets have large cash balances and not much debt and can go for their capex programmes without being much hurt by interest rates. Any slowdown may well be confined to export-sensitive sectors such as IT, auto and the like, which the market seems to have discounted already. But markets at peak always create some uneasiness among investors so some correction cannot be ruled out. However, stocks with potential to multiply two to three times in a year are not hard to find.
AIR DECCAN–CMP Rs 155
India’s newest airline group, Kingfisher Air Deccan, is set to rationalize its fleet and is considering changes in the total fleet order. It has 71 aircraft, 70 destinations and 33 per cent market share. The two airlines will offer the cheapest as well as the most expensive fares. Although the airlines will retain independent identities, the group will save on operation cost, maintenance, ground and baggage handling, feeder services, engineering and security. Also, the recent consolidation in the industry will reduce over-capacity existing in the market, leading to stable pricing. Together with reduced costs, the margin will increase. The stock can therefore have a substantial upside in the long run.
RELIANCE COMMUNICATIONS–CMP Rs 514
The company posted a strong set of numbers surpassing the market expectations. The net revenues rose by 6.5 per cent QoQ to Rs 3044.5 cr while net profit shot up by 31.6 per cent QoQ to Rs 771.1 cr. On the back of strong net subscriber addition of around 4 million and improved performance in global and enterprise segments, EBITDA margins have improved by almost 230 basis points QoQ to 40.7 per cent. Reliance Communications is capable of delivering a range of services spanning the entire infocomm (information and communication) value chain, including infrastructure and services — for enterprises as well as individuals, applications, and consulting. This stock will witness steady upward momentum from current levels.
