From the Business Today
Picture this scenario: unholy cow is a thriving restaurant in uptown Mumbai, doing a brisk turnover of, say, Rs 25 crore annually. One fine day, the owner walks up to you and offers to sell it to you for Rs 40 crore. You tell him you will think it over. A few days later the owner is back again, this time with an offer of Rs 60 crore. His reason for upping the price is that restaurants serving beef steaks have become the rage with the city's glitterati. You aren't convinced and send him on his way. A few days later the proprietor is once again back at your doorstep, this time with terror and alarm written all over his face. Apparently, a fundamentalist group from a village in northern India has descended on his restaurant, broken a few panes and plates, and threatened to put him out of business for serving beef. Distressed owner feels the end is near for his successful business, and puts a price tag of Rs 15 crore on it. You sniff a bargain here, and tell him it's a deal. The way you look at it is that the fundamentalist louts aren't going to hang around for ever, and once this short-term blip passes, people will once again queue up for beef steak, ensuring the long-term profitability of the restaurant.
No, this story isn't an attempt to convince you about the feasibility of the restaurant business (or the virtues of eating beef). Rather, it's a stab at explaining the way stock markets behave-to be more precise, how the Indian markets are behaving currently, why the indices have been slipping over the past fortnight, why it is no reason to panic, why, in fact, such a fall is healthy, and how you could take advantage of the current dip in stock prices. Since the benchmark index, the Sensex, has crashed by roughly 600 points since its peak of 6,696, the question on thousands of investors' lips is: Is the bull run over? It's not. Sure, there are a few humps to be crossed in the short term, but that doesn't mean that-like the restaurant owner-you should consider cashing your chips. That may mean you are kissing goodbye the prospect of further profits. For, the markets are just correcting themselves, and if you stumble upon many more like our distressed restaurateur in the market offering to sell their stock (at a lower price), just go ahead and pick up the bargains. For, as Motilal Oswal, Chairman and MD, Motilal Oswal Securities, puts it: "Corrections are good for the long-term health of the market. It has to consolidate now before the next bullish phase."
Having said all that, don't expect the indices to start shooting to the skies once you finish reading this piece. A bout of volatility in the short term is on the cards, but the shortest point is that the long-term fundamentals of the India story are still intact, and the Sensex is poised for even higher levels (higher than 6,600) in the not-so-distant future. "The Sensex should move towards the 7,000 levels by November 2005," says Andrew Holland, Chief Administrative Officer and Executive Vice President (Research), DSP Merrill Lynch. "It should reach 7,200 by the year-end," adds Deven Choksey, Managing Director, K.R. Choksey Securities. Here are five reasons why these gentlemen are so bullish, and why it wouldn't hurt you to put on your investing cap (and bull horns).
#1
Valuations are still favourable
That valuations are in the healthy zone isn't backed just by historical data. Sure, when you compare India to other emerging Asian markets like Korea, Thailand and the Philippines, you may get the feeling that stock prices are a bit stretched. But then, as Holland of DSP Merrill Lynch says: "You should also note that economic and earnings growth is much quicker in India than in most other emerging markets." The bottom line: If valuations of Indian shares have gone up a few notches, that run-up is pretty much justified. After all, India is the second-fastest growing economy in the world, right?
#2The breadth of the Indian markets is increasing rapidly
Thanks to the recent IPO boom, we have some extra-large-cap stocks, in the $5-billion (Rs 22,000-crore) range, listed on the stock exchanges. For instance, the number of such companies with a $5 billion-plus market cap has gone up from just four in 2001 to 14 today. Similarly, in the $1-5 billion market cap bracket, the number has more than doubled from 25 to 67 over the same period. Indeed, the listing of large-cap companies like ONGC, TCS and NTPC, to name just three, is increasing the breadth of the market, thereby making the market more attractive for large and long-term investors. What's more, these large listings are yet to get reflected in the global indices (like Morgan Stanley Capital Index) and hence India's current weightage doesn't do justice to its market cap or free float. That is one reason why most FIIs are overweight (compared to these benchmarks) on India now. With more and more mega-size listings expected (Jet, BSNL, possibly Reliance Infocomm, Hutch, Sony Entertainment and Sun TV in the private sector, and possibly Power Grid Corporation and Power Finance Corporation in the public sector), Indian markets can only get broader, providing foreign investors with many more opportunities to park their money. "India is no more a tiny place that global investors can ignore," says Manish Chokhani, Director, Enam Securities.
#3
Indians are consuming more, even as businesses look outward for growth
If the Indian economy is, er, shining, it's thanks in a large part to the contribution from industry, much of which is riding on the domestic growth story. "Consumption in India will increase manifold in the years to come due to the demographic changes (the percentage of the youth in the population is increasing)," points out Amitabh Chakraborty, Vice President and Head of Research (Private Client Group), Kotak Securities. What's more, it's not just the metros and mini-metros that are the playing fields for a retail-led boom; the action is trickling into semi-urban centres and smaller towns. What's also encouraging is that even as Indians consume more, domestic companies in sectors like automobiles, textiles, pharmaceuticals and information technology are looking overseas for growth-not just in terms of direct exports, but also by setting up or acquiring capacities in foreign markets. Result? Unlike many emerging markets, the Indian growth story appears to be benefiting from a healthy balance of domestic consumption and export-driven growth, thereby making it less dependent than most on the US. As a result, India is a great opportunity for investors wanting to diversify away from the US economic cycles.
#4
The investment cycle has only just begun
After years of waiting, watching and belt-tightening, Indian companies in various sectors ranging from cement to hotels to commercial vehicles to steel are blueprinting expansion plans, thereby signalling the beginning of a long-term cycle of capital expenditure, which could go on for at least five-seven years. At the same time, infrastructure investments in ports, highways, telecom, oil and gas, and power are picking up steam, propelled in no small measure by a reforms-committed government.
"With the capex cycle, industrial activity will pick up and consumption (both industrial as well as retail) will go up and it is very good for the economy," says Oswal of Motilal Oswal Securities. DSP Merrill Lynch estimates that total investment spend in the country will increase from $120 billion (Rs 5,28,000 crore) in 2004 to $208 billion (Rs 9,15,200 crore) by fiscal 2007. And don't forget that as a consumer benefiting from the housing sector boom-triggered a few years ago by low interest rates and greater affordability-you too will be doing your bit in fuelling economic growth. For, when you buy a house you buy the economy-be it steel, cement, electrical appliances, white goods, furnishings, the works.
#5
Indians are still grossly under-invested in equities
Dalal Street may appear more bustling these days, but that means little if you consider that the overall equity exposure of Indian retail investors is less than 1 per cent of their total investments. Stock market excesses, scams and scandals of the past, coupled with years of stagnation haven't exactly helped in attracting Indians to equity. What also doesn't help matters is that Indian investors typically enter only when they're very sure, which means that the market would have already gained 50 per cent by then, and they begin to dump their portfolio at the slightest provocation, chastened of course by past crashes. "us investors have lived through an 18-year bull market and, therefore, are attuned to buying on dips. Indian investors conversely sell on every rise since they have never seen any sustainable rally due to the excesses of 1992. And that explains why more and more share ownership is moving to foreign hands now," says Chokhani of Enam. Now, however, with other assured return tax-free products drying up (RBI Relief Bonds have gone, and the future of PPF is also under a cloud), Indian investors have no option but to invest in the stock market. Other factors will also contribute in increasing Indian ownership: For instance, with more and more young people getting into the investing class, the risk appetite also will increase. "The young will be ready to take higher risk," says Chakraborty. Other long-term monies, like pension funds, are also expected to enter the stock market soon. If our market holds on to higher levels for a reasonable time-and there's little reason why it won't-a bull market based on Indian public ownership will commence. By then, fears of "hot money" fleeing the country won't count for much, and hopefully Indian investors will be more attuned to corrections than crashes.