Pumping it up

Combined inflow of FIIs and MFs at highest-ever level

Returns of the Sensex thus far this year stand at 17.8 per cent, higher than the 13.1 per cent it had delivered in 2004. Similarly, the Nifty has given returns of 14.6 per cent thus far this year against 10.7 per cent in 2004.

Incidentally, the combined fund flow from foreign institutional investors and domestic mutual funds has reached the highest-ever level this year.

Together, institutional investors have pumped in Rs 39,038 crore into the equity markets till date this year. In 2004, the combined inflows stood at Rs 37,661 crore, while in 2003 it was Rs 31,325 crore.

What's different about this year's fund flows is that domestic mutual funds have also participated. In the previous five years they had reported a net outflow of Rs 8,310 crore compared with which the net inflow of Rs 6,916 crore this year is enormous.

Clearly, the huge amounts amassed by domestic funds through initial public offers since this year have resulted in this deluge of funds into the markets.

Also, it's not that FIIs have been going slow - in just the eighth month of the year, their net inflow is already about 84 per cent of the whole of last year's inflow.

.....but valuations are rich

Merrill Lynch's monthly survey of fund managers shows that India's net weighting score, that is the total number of fund managers overweight on the country minus the number of fund managers underweight, at -1 for August.

That's the first time in the last three months that this number has slipped into negative territory""-it was +10 in June and +7 in July.

In contrast, the net weighting for South Korea is 14 for August, 10 for Singapore, 7 each for Malaysia and Thailand, and 16 for Hong Kong.

These weightings often do little more than reflect the flavour of the month among fund managers, but there are ample reasons for a less bullish view towards Indian equities.

The biggest of them, of course, is the rich valuation of the market. With the Sensex PE at around 16.2 times trailing earnings, even those investors most optimistic about India may pause for breath. One explanation for the high valuations is that earnings growth in the Indian market is higher.

If we take Sensex earnings to grow by 15 per cent in FY06, growth is actually higher than in any other Asian market, except South Korea, where earnings growth is expected to be 22.5 per cent this calendar year.

But even on a forward PE basis, India is now more richly valued than Thailand, Malaysia, Taiwan, and the MSCI Asia ex-Japan index.

That may be the reason why fund managers have gone marginally underweight on India.

Merger of standalone refineries with OMCs

The oil ministry is evaluating the viability of merging standalone refineries with oil marketing companies (OMC) to ease the burden of surging subsidy losses faced by the latter.

The net subsidy burden (adjusted for discounts received from upstream players) on kersosene and LPG for OMCs like BPCL, HPCL and IOC amounted to approximately Rs 11,340 crore in FY05.

In contrast, the pre-tax profit of the stand alone refiners (set up by OMCs) such as Chennai Petroleum Corporation (CPC), Bongaigaon Refinery and Petrochemicals (BRPL) and Kochi Refineries amounted to approximately Rs 2,802 crore in FY05.

Of course, such mergers would not take care of the entire subsidy losses. But, the pre-tax profits of standalone refiners would have been able to finance about 24.7 per cent of the subsidy losses incurred by OMCs in FY05.

Analysts highlight that in the absence of a hike in retail petroleum products by the government coupled with the lack of a coherent subsidy sharing policy, even stop-gap measures such as the latest proposal would help to ease some of the burden on OMCs.

As part of that strategy, the petroleum minister has also indicated that IOC would need to work out a merger ratio with its subsidiaries CPC and BRPL.

With contributions from Mobis Philipose and Amriteshwar Mathur