Economy: Stocks; Bulls for Now

Economy

India Today, November 23, 1998
Nov 23, 1998

STOCKS
Bulls for Now

The lifting of sanctions and a series of other positive developments perk up the markets. But can the rally sustain and trigger an economic revival?

By Priya Ramani

India's stock market bulls, under cover since the start of the financial year in April and defenceless against an uninterrupted barrage of morose news, are finally being sighted. Markets across the country are breathing easy again. The Sensex, which hit its year-high of 4,322 points on April 22, had been skidding wildly, touching 2,741 points by the end of October following a series of negative developments, including the Unit Trust of India (UTI) mutual fund controversy. But the past fortnight seems to have cheered investors.

For one, the partial lifting of economic sanctions by the United States has come as a major relief. Riding on the back of the decision, the Sensex crossed the psychological 3,000 mark gaining over 99 points. "The good news is that there are obvious signs of a vicious circle turning virtuous," says Ashok Rout, India strategist at Paribas Asia Equity, which is underweight on most Asian economies except India. "The next logical event should be an upgrade in India's current non- investment grade rating." Post-nuclear tests, Moody's pushed India into the "speculative" grade category and lowered its rating by two notches to Ba2. Rout forecasts a degree of industrial revival in the coming six months and adds that markets have begun the process of re-rating in anticipation of this revival.

Early trends in investment by foreign institutional investors (FIIs) trading on the country's stock exchanges also reflect the optimism. Data from the Securities and Exchange Board of India (SEBI) show that foreign funds invested Rs 27.8 crore in equities during the first nine days of the month. Last month they withdrew Rs 574.7 crore from Indian stocks. Morgan Stanley Dean Witter, which remained one of the biggest bulls in the past year despite the problems plaguing Indian stocks, recently reiterated its positive stance. On a visit to the country, Managing Director and Global Emerging Markets Strategist Robert J. Pelosky Jr said he was bullish on three markets in the Asian region: India, Taiwan and Korea. India, in fact, tops Morgan's global emerging markets model portfolio with a recommended allocation of 13.1 per cent. Taiwan is the next Asian country in the list with 5.3 per cent.

Another major reason for the change in mood has been the promulgation of the share buyback ordinance, long projected as the panacea for the stock market's problems. As Jyotivardhan Jaipuria, vice-president at DSP Merrill Lynch, points out, "Buyback is positive because it establishes a floor for stock prices. Lower cap stocks which have been beaten down will see some interest come back." He expects around 12 companies to make buyback announcements shortly though many firms are likely to pass fresh resolutions, thus delaying the actual buyback programmes to early next year.

According to the SEBI guidelines which were finalised last week, companies can buyback their own shares via several modes, including open offers and stock market transactions. Buyback through negotiated deals, spot transactions and private placements have not been permitted. "My concern is that people are expecting too many companies to participate immediately in the whole process. A large number of companies are strapped for cash and have huge debt to equity ratios," says Rukhshad Shroff, India strategist at Jardine Fleming India Broking. "But in the longer run it's a valuable corporate finance tool." SEBI's pronouncement that promoters can increase their stake in companies by 5 per cent every year (against the previous 2 per cent) without making an open offer is also expected to lead to demand for shares in the near term.

The long-delayed clearance for share buybacks also coincided with Prime Minister Atal Bihari Vajpayee's bid to kick off the country's divestment programme -- with an offer of up to nine million shares of the Container Corporation of India (Concor) -- and his announcement that an infrastructure task force had been set up to recommend financing options and other measures to complete infrastructure projects on time.

Besides the growing acceptance of the share depository, the Concor offer and a relatively stable interest rate, factors that will spearhead the technical rally in the coming six months include cheap valuations, a revised index from November 16 to include key software and pharma stocks and the traditional year-end book closure of global India funds.

Sceptics, however, feel that persistent economic ills and the assembly elections will ensure that any stocks rally does not sustain. Shroff, who describes his stock market view as cautiously optimistic, says the market is likely to see a trading bounce in the coming weeks but "I don't see a roaring bull market because of the constant punctuation of bad news". HSBC Securities too projects a sharply deteriorating fiscal situation with increased monetisation, a steady depreciation of rupee and a GDP and industrial growth of 3.6 per cent and 3 per cent respectively for the current year. The bulls are unlikely to give the bears a run for their money. "I can't see anything positive. We do not expect any economic upturn in the next 18 months," says Sanjeev Mohta, head of research at HSBC.

These projections are only slightly lower than those of the Centre for Monitoring Indian Economy (CMIE) which forecasts an industrial growth of 4.5 per cent and an increase in agricultural production of around 1.2 per cent. CMIE outlines the gloomy first-half results scenario where sales growth of the country's top 50 business houses declined from 10 per cent to 5 per cent, while their profits declined by 22 per cent against an increase of 3 per cent in the previous year.

There are also fears that investors who have so far focused on the upbeat pharmaceuticals, software and fast-moving consumer goods sectors, will find it more difficult to make money in these segments. They will have to wait for a price correction before buying into these shares which had a good run despite the weak trend. Even in the case of buybacks, some analysts say that SEBI has rushed through the guidelines, which would mean that a lot of loopholes will be left unplugged. And then there is the concern over the health of UTI despite repeated assurances by the Government. Options before the committee set up to restore UTI's credibility include converting US-64 into a government-guaranteed savings scheme or making dividends tax free, thus allowing UTI to give a lower dividend while maintaining the post-tax returns of investors.

Given these conditions, the gloomy stock markets can get a real boost only if the regulators take action on long- delayed issues like punishing "vanishing" companies and restoring investor confidence. "We have gone into the stage when Anacins and Saridons won't help," says Prime Database's Prithvi Haldea. "We need strong antibiotics." And we need them fast.

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