The Sensex is well past 17,000, riding the announcement of a half per cent cut in interest rates on federal funds by the Federal Reserve. This indicates a reversal of policy for the first time in four years. This will ease the borrowing cost for banks in the US, prompting them to cut their PLRs to override the credit crunch. Though this has been done to boost the US economy, the money may not go to US stocks due to uncertainties still surrounding their economy. Rather, it may go to emerging markets such as India because of high rates of growth, little or no exposure to sub-prime problems, strong domestic demand, and so on. The further surge of capital inflows may require Reserve Bank of India (RBI) intervention in the forex market to prevent the rupee appreciating beyond a certain level.
With Chinese banks offering
rates of interest well below
the rate of inflation and the
Chinese stock market over
heated, one can imagine the
kind of inflow that a market
like India can attract
The RBI could therefore cut interest rates in the forthcoming mid-term review of monetary policy due to the prevailing low rate of inflation and the fall in the Index of Industrial Production (IIP) in July. It is this expectation that has seen a steep jump in stocks of interest-sensitive sectors such as real estate, auto, banking, finance, etc.
With CRR at 7 per cent, tight ECB norms, and the reverse repo rate at 7.75 per cent, any move by the RBI will be dictated purely by the movement in inflation and the flow of credit. The present low rate of inflation may be short-lived as the high base effect wears off soon. With the sharp surge in crude prices, increasing commodity prices, excessive liquidity coming from abroad, early election-related government spending, and rising food prices, it is highly unlikely that The RBI will cut the CRR or interest rate, more so when the momentum in credit growth is likely to pick up further post-harvest due to a good monsoon, and the economy, which has grown at 9.3 per cent in the April-June quarter, is likely to maintain the same pace. The increase in auto sales and demand for housing and housing-dependent industries is gradually picking up The excise collection in August, which increased by 9 per cent compared to a year ago, also points to the rebound taking place in industrial production.
The Sensex, which is already at a PE multiple of more than 21, may see a further rally purely due to liquidity inflows unleashed from abroad. With Chinese authorities allowing retail investors to invest in overseas stocks through qualified domestic institutional investors (QDIIs), liquidity inflow is likely to increase further. The first QDII offer was launched by the Shenzhen-based China Southern Fund Management. The fund got permission to raise $2 billion (Rs 8,100 crore) and was to be open from September 12–28. The target amount was achieved within an hour of opening, and the sale window was closed after the first day, having raised a whopping $7 billion. The fund will invest its corpus in 10 markets, including India. With Chinese banks offering abysmally low rates of interest well below the rate of inflation and the Chinese stock market already overheated, one can imagine the kind of inflow that a market like India can attract. Chinese banks have an estimated $2.3 trillion lying in low-yielding bank accounts.
India is therefore an excellent long-term story on the back of rising incomes, robust domestic demand, favourable demography, a rising services industry, and growing infrastructure spending to sustain an 8 per cent plus GDP growth rate. So stay invested and do not attempt to time the market. However, don’t be complacent and keep your positions in balance with ready 25–30 per cent cash to make use of any correction in the near future.
Tata Sponge
(CMP Rs 170)
Promoted by TISCO, Tata Sponge is an ISO-9002 and ISO-14000 company. It is the first company based on indigenously developed direct reduction technology patented in 1978. The technology uses non-coking coal, which is economical compared to coking coal. Coupled with a captive power plant, it is among the cheapest producers and is also likely to generate additional revenue by selling surplus power. All this will get reflected in the current year’s performance With a book value of Rs 122, a likely EPS of Rs 40 for the year, and a consistent dividend record, the stock can be a real multibagger.
Mangalam Cement
(CMP Rs 210)
Trading at a significant discount to its peers despite strong fundamentals, the stock is in for a re-rating, more so because of a rumour that it will be taken over by the Aditya Birla Group. The company has launched an ambitious capex programme and is about to commission a captive power plant worth Rs 80 crore. This will add Rs 35–40 crore to its FY8 net profits. The company will shortly announce a new greenfield unit to make use of its annual free cash flow of Rs 100 crore. A robust operating margin of 26.6 per cent, PAT margin of 18.4 per cent, a low debt-equity ratio of 0.5, and ROCE at 36.8 per cent — it has all the ingredients of a multibagger in the making.
