Cover Story: Stock Markets; Burning Ice

The prices of infotech, communications and entertainment stocks are soaring, leaving conventional industry scrips light years behind. Other sectors will recover only if the coming budget offers a combination of fiscal and monetary incentives.

I for infotech. C for communications. E for entertainment. ICE is aflame. Of the 5,000-odd stocks listed on the Bombay Stock Exchange, over 95 per cent are of businesses of a material kind. Like making steel, refining crude oil, baking cakes and cookies, formulating chemicals and drugs. There are many of them in the finance business, as banks or as lending companies. Still they're non-ICE. Less than 200 of the listed companies are ICE. Take them out, and see what this action does to the stock-market indices. None of them has then moved at all in the past eight years, since the securities scam broke out in March 1992 after driving the 30-scrip sensitive index (Sensex) of the stock market to 4,200. If you invested a lakh of rupees on the erstwhile Sensex shares (its composition keeps changing), which had no ICE scrip at that time, and diligently held on to the portfolio, you wouldn't have got more by cashing out now.

IF YOU HAD INVESTED RS 1 Lakh in January 1999...

Fund One: Safety First
Fund kept in 365-day bank fixed deposit
Nav: Rs 1,10,500

Fund Two: Sensex is Best
Invested in shares tracking weightages
Nav: Rs 1,98,000

Fund Three: Pharma Fund
Invested equally in Cipla and Dr Reddy
Nav: Rs 2,50,000

Fund Four: non-ICE Fund
Invested equally in HLL, RIL and Telco
Nav: Rs 1,69,290

Fund Five: ICE Fund
Invested equally in Infosys, Wipro, Zee telefilms and Himachal Futuristics
Nav: Rs 10,06,000

on 11 February 2000;

On the other hand, track only the three ICE stocks included currently in the Sensex -- Infosys Technologies, NIIT and MTNL -- over a year and ... well, hold your breath! In fact there is no E stock yet in the Sensex package. The three are only I (Infosys and NIIT) and C (MTNL) scrips. The average value of these three stocks has grown 466 per cent since January 1, 1999. A portfolio of ICE stocks has got its value soaring from one lakh rupees in January last year to over Rs 10 lakh now.

A couple of months ago, the fast-growing stocks were collectively named "technology" stocks, covering companies that earned quick profits, and raised investors' hopes, by exporting to the US market software developed in India at relatively low labour costs. The tech stocks -- Infosys, Wipro, HCL Infosystem, Satyam Computers and Satyam Infoway -- are still doing well. However, their ranks have been joined by super-achievers in the telecom sector, like VSNL, Himachal Futuristics and Global Telesystems, and the new emperors of entertainment software, like Zee Telefilms, Crest Communications and, quite dramatically, Sri Adhikari Brothers, a producer of television soap operas. Television Eighteen India Limited (TV-18), yet another television software company, which had offered its maiden public issue a couple of months ago at a price of Rs 180 hit Rs 1,950 on the first day of its stock-exchange listing last week. The IPO itself had been oversubscribed 60 times.

The ICE syndrome now threatens to turn upside down the traditional hierarchy of Indian business, yesterday's dinosaurs becoming today's fossils. Rahul Bajaj's flagship Bajaj Auto scrip was valued at around Rs 500 in early 1999; today it is traded at Rs 330. Those who are sashaying in the arc-lit zone of the market -- like Subhash Chandra of Zee Telefilms, Vinay Maloo of Himachal Futuristic or even N.R. Narayana Murthy of Infosys -- were quaint names to fund managers a few years ago.

How long will the ICE rally last? Economist Surjit S. Bhalla, who manages the small (Rs 8.5 crore) and closely-held Oxus Fund, is a cautious stockpicker who never tires of declaring his abiding faith in keeping the basket wide enough to "spread risk". However, he offered a giddy 180 per cent return to his equity investors in 1999 by apportioning nearly 70 per cent of investment to the ICE sector. So far this year, Oxus has notched up a 40 per cent yield without much changing the basket of categories. The ICE obsession extends to large funds. Birla Advantage Fund, which is among the most successful mutual funds in the market, having recorded a Net Asset Value (NAV) of Rs 69.92 from Rs 10 five years ago, put as much 52 per cent of its investment in infotech and entertainment stocks. Quite a few mutual funds -- notably Kothari Pioneer -- are about to launch dedicated Internet funds while even foreign funds like Morgan Stanley are jealously guarding their ICE acquisitions. An FII fund manager says that the prices of infotech and entertainment stocks should rise uninhibited for a pretty long time because the basic raw material of the business, "the human intellectual potential", is expected to remain undervalued in the years to come. Companies like Infosys and Wipro and Zee Telefilms, the entertainment software maker, have made it big so far because of the relatively low wage rates of intellectual labour.

Why the rush into ICE stocks? Bhalla says the ICE stocks are "not a bubble" because "there will be 30 to 40 per cent growth in their real value at least in the next five years". The economic logic behind the argument is that, unlike in the manufacturing sector, the ICE sector is not founded on borrowed capital. Its most valuable asset is the human mind. Not being tied to high-interest loans, this sector has little to spend on servicing capital. On the other hand, the "real" economy of factories, warehouses and conveyor-belts, is too much weighed down by capital costing -- 12 to 14 per cent -- to pick up a decent profit growth.

How will non-ICE stocks fare? They will do better than in the recent past only if Budget 2000 triggers a fall in the real interest rate, which is the difference between the nominal interest rate and the wholesale price inflation. The average real interest (for the best borrowers) in fiscal 1999 was a high 9.6 per cent. If it drops to the 1998-99 real interest rate of 6.1 per cent -- caused in that year, obviously, by a high inflation rate -- the non-ICE sector will be propelled on a new growth path. In fact it is on this expectation from Finance Minister Yashwant Sinha's forthcoming budget that foreign portfolio investors have pumped in Rs 1,350 crore of net investment in February alone. The long-term investor cannot be attracted by the single flavour of ICE. Says Alok Vajpayee, chief operating officer of DSP-Merrill Lynch: "The downward interest rate scenario is making many stocks attractive." Besides, the fast moving consumer goods (FMCG) sector is more responsive to the economy as general affluence boosts demand.

Will the Sensex rev up further? Three-quarters of the weightages in the Sensex is due to the non-ICE stocks, ranging from the lacklustre Indian Hotels to the time-tested Hindustan Lever. It took decades to breach the 5,000-mark, which it did earlier this year. And in the past seven weeks it is hugging the 6,000 line. The same speed-multiplier effect was witnessed when the Dow Jones index languished at 5,000 and then raced past 10,000 in a year, to bob up and down the 11,000-mark now.

Stock prices are driven by the expectation that companies will perform well, and the availability of the cash -- or liquidity -- to buy shares. The companies are indeed performing well. And, as economists calculate, if the government's nominal borrowing rate comes down by 200 basis points, from 11 per cent now to 9 per cent, it will release Rs 4,000 crore for investment in the stock market. It will also lessen the interest burden on the non-ICE businesses. If that happens, the Sensex will scale new peaks. If money remains dear though, these heights will remain distant iceblinks.

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	Feb 28, 2000