Stocks - what now?

GUEST COLUMN/ TORCH-LIGHT

Over a month ago, the Sensex looked set to roll past the 7000-point mark. At that time, I cautioned that there were 'speed-breakers ahead' (The Smart Investor issue dated March 14, 2005).

Unfortunately, almost every speed-breaker I mentioned has grown to the size of a little hillock and the 8000 points mark, which market players were dreaming off, now seems far more distant than ever before.

After seeming to have fared better than many of its Asian contemporaries whose stock-markets were shaken up recently, the Indian markets, too, appear to be showing signs of buckling under pressure.

It may still be too early to pen an epitaph for the secular bull run that started way back in June, 2003. After a rise from the 4200-point level to an all-time high of close to 7000 points in March this year, the BSE Sensex dipped below 6400 within one month. The only serious aberration during the last two years came on a single day - May 17, 2004 (Black Monday) - when the markets nosedived.

This drop had come against the backdrop of a series of market-unfriendly statements made by the leaders of the Leftist parties that cobbled up enough seats in the general elections to be a vital cog in the coalition government.

The statement that triggered the crash was the one where the Left spokesman stated that his party would do everything it could to stop the government from divesting its stake in public sector units.

Interestingly, less than two months ago, all was hunky dory and the markets were looking forward to Finance Minister Palaniappan Chidambaram's budget announcements.

Unfortunately, the finance minister could not live up to market expectations and the decision to bring in fringe benefit tax (FBT) spooked the markets.

FBT proposes to disallow a certain percentage of specified business expenses, which makes it some kind of an expenditure tax.

Notwithstanding every successive finance minister's argument, it is a fact that income-tax rates in India are high given the absence of social security. Hence, FBT, the implications of which are still not very clear, has been seen as a form of double-taxation.

Amidst this confusion, crude oil prices kissed the $60 mark before re-tracing. Causing further panic on this front was a report published by a large FII that said crude oil prices could touch the three-figure mark. While this may seem exaggerated - at least as of now, given the amount of oil that India imports - it is surprising to note how and why fund managers investing in India chose to ignore this time bomb even as it ticked ominously.

With the quarterly results season round the corner, there is a flicker of hope that better-than-expected results might help stem the ebbing market tide. Sugar, information technology and steel sectors are expected to post good results while auto companies are expected to be underperformers on account of rising input costs and the reduction in off-take.

The last and final hope remains divine intervention. India still being an economy where the fortunes of the agricultural sector have a multiplier effect, the importance of a good monsoon cannot be ignored.

Here too, the law of averages seems to be working against the probability of a bumper monsoon of the kind that propelled the Indian economy during the second half of 2003.

Against that backdrop, the Indian economy had raised its GDP growth beyond 8 per cent for the first time, and by December, 2003, foreign fund inflows had begun to surge.

On the policy front, the government raised the ceiling on FII investments in Indian banks to 25 per cent from 10 per cent. The announcement, which would have brought cheer to the stock markets in better times, elicited cynical response that it was made to facilitate the easier selling of the government's stake in PSU banks, which is being done through the public issue route.

The share price movements of Punjab National Bank (PNB) and Allahabad Bank post-issue have not really instilled investors with confidence. The only IPO in recent times that has performed well post-listing has been Gateway Distriparks. Therein lies the message that pricing matters.

Yet another source of worry is the drop in industrial output for February to 4.9 per cent from 8.3 per cent in the year-ago period.

Does all this mean that the party at the Indian bourses, which lasted two full years, barring the Dark Monday, is finally over? Perhaps not, at least, not as yet. After all, even with a downward revision of GDP growth projection to 6.5 per cent, the Indian economy remains one of the faster growing ones.

Also, though the pace of economic liberalisation leaves a lot to be desired, its direction now appears irreversible. Besides, once the markets dip to a certain level, value-buying could commence and stem the tide. When that will happen, however, remains the million dollar question ?

(The author heads Lotus Knowlwealth, Mumbai, and can be contacted at ceolotus@hotmail.com. Disclosure: He has no outstanding interest in the shares of the companies discussed here.)

RESEARCH CALLS
BHARAT FORGE
(BUY, TARGET PRICE Rs 1,808)

DSP ML has initiated coverage on Bharat Forge with a 'buy' and a 12-month price target of Rs 1,808. It believes that the market opportunity for the company's operating segments is large at around $8 billion.

Bharat Forge has the credentials to deliver $1 billion sales by FY2008E, up from $350 million in FY04.

The company's earnings are expected to register 60.6 per cent CAGR over FY05-07E, as ongoing capacity expansions are largely pre-sold. Earnings accretions of 23.3 per cent and 17.0 per cent are expected in FY06E and FY07E respectively.

RELIANCE INDUSTRIES
(BUY, TARGET PRICE Rs 676)

CLSA has reiterated a buy on Reliance with a 12-month price target of Rs 676. Reliance's refining margin upcycle is expected to continue till 2009.

The cyclical peak in petrochemicals (45 per cent of profits) is still 12-15 months away and profits from the business will be maintained beyond this peak as Reliance is expected to expand capacity by 20 per cent.

CLSA expects the first phase of expansions to come on stream in Q4 FY06. The scrip is trading at a 28 per cent discount to the market and a 20 per cent discount to CLSA's sum-of-parts value.

TITAN INDUSTRIES
(BUY, TARGET PRICE Rs 392)

Refco Sify Securities has initiated coverage on Titan Industries with a 'buy' and a price target of Rs 392.

According to its report, Titan Industries, a market leader in watches and branded jewellery, is on a comeback trail. It is expected to post a CAGR of 23 per cent in branded jewellery sales from FY04-07, while Sonata watches would grow in volumes by 15 per cent.

The research house expects the company to report a 17.5 per cent growth in topline and 33 per cent growth in adjusted profits over FY05-07. Management restructuring and capital infusion will aid earnings further.

AVENTIS PHARMA
(BUY, Rs 1,640)

Pranav Securities has maintained a 'buy' on Aventis Pharma with a medium- to long-term price target of Rs 1,640. Faster growth in strategic brands and exports/outsourcing apart from control over costs have had a positive impact on Aventis' operating performance.

Outsourcing from parent and exports is expected to be a major driver in the coming years. The outsourcing business is expected to grow 20-25 per cent in the years to come.

On the other hand, exports will push revenue and profitability. The stock is attractively valued at 15.4x CY06E earnings.