Deflating bubble

The question is, can a mere Budget thwart global forces?

Would the stock market have crashed even if the BJP came back to power? The question seems absurd, especially since the market fell so dramatically after the election results. Yet the numbers seem to show that the markets would have fallen dramatically, never mind which party won the elections.

The Morgan Stanley Capital International (MSCI) Emerging Markets Index has lost 3.4 per cent in the month to June 18 and 11.7 per cent in the quarter to that date.

The MSCI Asia index fell 6.3 per cent in the past month, and 14.9 per cent in the last quarter. Compared with the Asia index, MSCI India hasn't done too badly, gaining 1 per cent in the month to June 18, and losing 12.9 per cent over the quarter.

Contrast the China MSCI index, down 7.8 per cent over the month and 15.5 per cent over the quarter. Or take the Korean index, which lost 9.3 per cent last month and 19.4 per cent in the last quarter. None of these countries had an election, and yet they've lost more in the last three months than the Indian market.

Would the market have lost less if the BJP was voted back with a bigger majority? Consider Malaysia, where a reformist government was voted to power with a far bigger mandate. The MSCI Malaysia index lost 10.6 per cent over the quarter, and it gained just 0.78 per cent last month, less than the Indian index.

In Taiwan, where they had a more controversial election (the opposition claimed electoral fraud), the index has lost 7 per cent last month, and 14.6 per cent over the quarter. So it's probable that the bloodbath in the Indian market may have been a shade more muted, but the damage would nevertheless have been very significant.

What about the much-vaunted fundamental strengths of the Indian economy? Well, the Chinese, Indian and Thai economies have been the best performers recently, but look at what happened to them this year. The MSCI indices for the Thai and Indian markets are down 16.5 per cent and 18.3 per cent, respectively, in 2004, while MSCI China has lost 18.1 per cent.

Will the Budget bring back foreign money? There are some encouraging signs "" foreign institutional investors (FIIs) have been net buyers of Indian stocks this month, and they have so far sold far less in India than in South Korea or Taiwan.

FIIs say that much of the selling has already happened, and a quarter percentage point rise in the US Fed funds rate every quarter has now been priced in.

But the problem is, if the sell-off has little do with domestic conditions, then so too will the recovery. Central banks across the world have, for the last three years, unleashed a flood of liquidity, and the money found its way into asset markets across the world, buoying stocks, bonds and commodities.

Now that money supply is being tightened and interest rates being hiked, these bubbles are in danger of deflating. Can a mere Budget fight against such powerful forces?

The spin in Moser Baer

Moser Baer has been de-risking its business by increasing the share of revenues from the domestic market. In FY04, revenues from the domestic market jumped 96.6 per cent to Rs 240.7 crore, or 16 per cent of total revenues.

It now expects domestic sales to grow 40 per cent in the current fiscal, and account for 20-25 per cent of sales in three-four years time.

Incidentally, this segment already accounted for almost 20 per cent of sales in the last six months of the previous fiscal. In fact, in the second half of FY04, domestic sales accounted for almost 50 per cent of incremental sales.

Sales in overseas markets, which amounted to nearly 90 per cent of total sales till recently, grew at a much lower rate partly because of a 10 per cent fall in CDR prices in the March quarter.

In any case, the de-risking strategy makes sense given the vagaries of the overseas market and the fact that Moser Baer has had to constantly deal with anti-dumping restrictions. What's more, domestic sales have better margins, which could improve further if the company manages to increase the sales of its own brand.

Regardless of which markets the company sells in, its profit is still extremely sensitive to changes in prices of CDRs and DVDRs. For this reason, the stock trades at an extremely low PE multiple of fives times trailing earnings.

But given the low valuations, some optimistic analysts believe it's a good time to buy into the DVDR growth story, which hasn't happened on a large scale yet.

With contributions from Mobis Philipose