The markets, at 13,000 levels, have also been subjected to increased volatility caused by continuous flow of information on multiple fronts – most of the time negative. The weekly inflation figures, daily crude prices, day-to-day political developments in view of the nuclear deal, international news such as Iran’s nuclear programme are some of the factors that have kept the market on tenterhooks.
The steep correction seems
to have discounted most of
the uncertainties….A realis
tic picture about valuations
will emerge only after a few
months in view of possible
earnings downgrades
The variables influencing the markets have become so complex that it has become difficult to take a call. Inflation is hovering at around 12 per cent with crude prices reaching sky-high levels of $140. Interest rates have been rising steadily and have started impacting corporate profitability and growth. The outflow of FIIs’ funds is not seen to be abating on the back of unprecedented turbulence in international credit, equity and commodity markets.
The uncertainty with regard to the longevity of the government in view of the withdrawal of support by the Left parties opposing the nuclear deal has also added to the woes of the market. The likelihood of any reforms being pursued despite the exit of the Left looks bleak in view of the imminent early elections and the consequent compulsions of the government to keep the electorate happy.
Expectations of a slowdown seem to have been confirmed with the latest IIP numbers. The growth in index of industrial production for May declined to 3.9 per cent as against 10.6 per cent in the same period last year which is way below expectations. Manufacturing growth and that of capital goods also declined to 3.9 per cent from 11.3 per cent and to 2.5 per cent from 22.4 per cent respectively, on year on year basis. All this has made the government rethink its GDP growth target for 2009, which is likely to be revised to 8 per cent or lower. And, if things don’t improve soon, we may see the rating of the country downgraded by agencies like Standard & Poor.
But, a decline of almost 40 per cent from the peak achieved in January has made analysts rethink the valuations which many of them say are looking compelling. The steep correction seems to have discounted most of the uncertainties that we have talked about earlier. However, a realistic picture about valuations will emerge only after the next few months in view of the possible earnings downgrades.
Since the markets always discount the future – the future in the long run either doesn’t appear to be too bleak or if so is substantially discounted. The FIIs’ selling is mainly forced by international developments and they appear to be underweight on India now. Moreover, looking to the increased number of FII registrations with SEBI – which has added 244 fresh sub-accounts and 44 FIIs in a month’s time to take the total number of sub-accounts to over 4,300 and that of FIIs to over 1,400. The present scenario of virtual gloom provides an excellent buying opportunity. Though there may be some more downside left due to political and other developments, investors should not attempt to time the market and start investing in a staggered manner. The failure of monsoon in practically the entire western & southern India may turn out to be a dangerous villain for the markets and can further deteriorate the scenario.
This also supports the popular saying that most bull runs are born in pessimism, grow in scepticism, mature in optimism and burst in euphoria.
Neyveli Lignite Corporation
(CMP Rs 100)
Established in 1956, Neyveli – a mini Ratna of the Government of India – is a pioneer in excavation of lignite and generation of power at pit-head thermal power stations. The company’s activities are spread over Rajasthan, Gujarat, Orissa and Tamil Nadu. During 2007-08, the company surpassed all previous records in lignite excavation and power generation, and far exceeded its own targets for the year. The company is on a massive expansion plan and is likely to invest Rs 6,630 crore over the next two years in both mining and power generation. With cash of over Rs 4,800 crore and power bonds of Rs 825 crore, the company is in a strong position to support its expansion plan more so due to almost zero debt on its books. This is likely to give a big boost to its profits in years to come.
On financials, the total income of the company increased by 65 per cent in 2007-08 to Rs 36,380 million from Rs 22,101 million the previous year. The operating margin increased to 52 per cent from 40 per cent in the same period. Net profit increased by almost 95 per cent from Rs 566 crore to Rs 1,101 crore with EPS increasing to Rs 6.58 as compared to Rs 3.38 per share.
Besides strong fundamentals, the company is also a potential disinvestment candidate as soon as the reforms are back on track – the possibility of which now appears good with the exit of the Left.
