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Tuesday, June 12, 2007
Morning Notes
US markets were flat & asian mkts are trading negative . Bias for Mkts cautious, with possible support for nifty being at 4109 and possible tgt being 4162
Nifty lvls : support at 4120 /4080/4040 and resistance at 4160 /4180 /4200
News : Hexaware tech has won an 18mn$ project from Japanese systems integrator,with further scope to go up to 33mn$ for modernising technology of postal services and involves development of a core application, Patni Computer tie-up with UK company Clear Technology, Mukesh Ambani-controlled Reliance Industries (RIL) is bidding for the project jointly with Siemens and Gammon and Anil Ambani-controlled Reliance Energy, which has bagged the contract for the Metro phase one, has joined hands with Canadian firm SNC Lavalin for the second stretch.,
Centre to review petrol, diesel prices in July, L&T Infotech to spend Rs 600cr on expansion, Gayatri Projects bags order worth Rs 140 cr
The total open interest in the market is 62,639 crore and added around 829 crore in open interest.
Stocks with +ve bias :L & t,Infosys,
Stocks for short term delivery: Unichem
Stocks for Investment :Genus overseas and BASF.
Indiainfoline - Intraday Stock Ideas
NIFTY (4146) SUP 4118 RES 4188
BUY VSNL (465)
SL 460 Target 473, 477
BUY Biocon (442)
SL 437 Target 451, 455
BUY HPCL (274)
SL 269 Target 282, 285
SELL ACC (763)
SL 769 Target 751, 748
SELL Birla Jute (211)
SL 215 Target 203, 200
The struggle continues
Whatever the struggle, continue the climb. It may be only one step to the summit.
The bulls appear to be struggling at the moment, not just in India but across the world. We expect a soft opening today on the back of some weakness in the Asian markets and a flat finish on Wall Street. Crude oil too is hovering above the $65 per barrel mark. The market will remain volatile, with alternate bouts of buying and selling. One should stick to a stock specific strategy to avoid a bigger hit in one's portfolio.
FII inflows seem to have dried up over the past couple of weeks after the April-May euphoria. Ever since the Nifty made a new lifetime peak, the market has lost its momentum. The underlying sentiment has weakened slightly mainly due to global concerns and lack of fresh local catalysts. The immediate trigger would be the progress of monsoon. The next trigger could come from the first-quarter earnings, which will start trickling in from the second week of next month. Before that, we have the industrial production data coming in today.
A sharply lower reading on this front could signal a slowdown in the economy and therefore in earnings growth. One positive to emerge from this could be that inflation may cool off. As a result, there will be less pressure on the RBI to hike rates. Still, the central bank governor has made it a habit to surprise the markets, and one never knows what he has in store for us.
The latest data from China shows that inflation accelerated last month, increasing the possibility of higher interest rates. There is also a possibility that Bank of Japan may hike its key rate in the next few months after the world's second-largest economy expanded at a faster pace than earlier anticipated in the first quarter. Last week's comments from Federal Reserve Chairman Ben Bernanke hinted that interest rates in the US will at best remain unchanged this year. Some are even betting that rates in the US could even head higher next year if the economy there picks up pace as predicted by Mr. Bernanke himself. Central Banks in the UK and Europe too are eager to keep the threat of inflation at bay.
FIIs were net sellers to the tune of Rs261.2mn (provisional) in the cash segment yesterday while the local institutions pumped in Rs2.37bn. In the F&O segment, foreign funds net buyers of Rsbn yesterday. FIIs pulled out Rs9.36bn from the cash market on Friday. Mutual Funds were net buyers of Rs2.27bn on the same day.
US stocks ended flat, giving up most of the day's gains, with investors showing reluctance amid rising Treasury yields and higher oil prices. Energy and financial shares rallied on prospects for higher earnings.
The S&P 500 closed flat at 1509.12. The Dow Jones Industrial Average too ended nearly unchanged at 13,424.96. The Nasdaq Composite Index finished static at 2572.15.
After the close of trade, Texas Instruments narrowed its second quarter revenue forecast to a level that could miss analysts' estimates. The chipmaker also narrowed its earnings forecast to a level that is in line with analysts' estimates. Shares fell 2% in extended-hours trading.
US bond yields fell an earlier advance and have retreated 0.10 percentage point from their high last week. Treasury prices slipped, raising the yield on the benchmark 10-year note to 5.15% from 5.1% late on Friday.
In currency trading, the dollar rose modestly versus the euro and the yen. COMEX gold for August delivery rose $8.70 to settle at $659 an ounce.
US light crude oil for July delivery advanced $1.17 to settle at $65.93 a barrel on the New York Mercantile Exchange. The front-month contract was quoting 17 cents lower at $65.80 a barrel in extended trading.
European stocks advanced. The pan-European Dow Jones Stoxx 600 index added 0.8% to 388.01. The German DAX Xetra 30 closed up 1.5% at 7,706.10, the French CAC-40 rose 1% to 5,940.09 and the UK's FTSE 100 added 1% to 6,567.50.
In the emerging markets, the Ibovespa in Brazil rose 0.85% to 52,776 while the IPC index in Mexico was up 1.2% at 31,833 and the RTS index in Russia advanced 0.5% to 1798.
Asian stocks are mixed this morning. But, materials and energy shares rose after the price of metals and crude oil rebounded. BHP Billiton climbed to a record, leading advances on the Morgan Stanley Capital International Asia-Pacific Index.
The MSCI index added 0.2% to 151.01 as of 10:15 a.m. in Tokyo, extending yesterday's 0.2% advance. Benchmarks rose in markets open for trading around the region, except in Japan and Malaysia.
The Nikkei 225 Stock Average slipped 0.2% to 17,792.29, after earlier rising as much as 0.2%.
A measure of six metals traded on the London Metal Exchange gained 2.2% yesterday, rebounding from a four-day 6.7% slide. Copper climbed 3.1%, while zinc rose 3.3%.
Markets witnessed flat close however managed to end in positive terrain. Select, IT, Pharma and FMCG aided some support as Banking and Consumer Durable were the major draggers. Even the Mid-Cap and the small cap came under selling pressure. Grasim, ONGC and SBI were among the major losers, however GAIL, Tata Power and VSNL were the major gainers among the 50scrip’s of NSE Nifty. Finally, the 30-share Sensex added 19 points to close at 14083. NSE-50 Nifty was flat at 4145.
Satyam Computer gained 1% to Rs497 after the company partners with JDA Software group. The scrip touched intra-day high of Rs513 and a low of Rs492 and recorded volumes of over 49,00,000 shares on NSE.
Bharti shipyard gained by 1.7% to Rs475 after the company announced that they have secured order worth $65.1mn from Norwegian offshore. The scrip touched intra-day high of Rs486 and a low of Rs467 and recorded volumes of over 50,000 shares on NSE.
RPG Life Sciences spurred by over 5% to Rs105 after the company announced its plans to separate its Pharma Biz, investment. The scrip touched intra-day high of Rs112 and a low of Rs102 and recorded volumes of over 76,000 shares on NSE.
Welspun Gujarat surged nearly by 3% to Rs183 after the company secures orders worth Rs11.66bn. The scrip touched intra-day high of Rs187 and a low of Rs180 and recorded volumes of over 20,00,000 shares on BSE.
Gayatri Projects spurred by over 3% to Rs266 after the company secured order worth Rs1.4bn. The scrip touched intra-day high of Rs270 and a low of Rs259 and recorded volumes of over 1,00,000 shares on NSE.
Technology stocks pared their gains as rupee strengthens against the US Dollar. Wipro pared its gains as it slipped 1% to Rs542, Polaris was down by 3.6% to Rs162 and Moser Baer dipped by 4.3% to Rs434. However, Satyam Computer gained by 1% to Rs497, Infosys was up by 1.5% to Rs1979.
Select Auto stocks were on the receiving end. TVS Motors lost by 1% to Rs63, Maruti was down 0.6% to Rs733 and Bajaj Auto edged lower by 0.2% to Rs2115. However, Hero Honda was up 2% to Rs698, Tata Motors added 0.2% to Rs653.
Pharma stocks were in good health. Glenmark Pharma gained by 1% to Rs684 after the company announced that they would split each share into two, Ranbaxy was up by 0.6% to Rs370, Cipla was flat at Rs210, Glaxo gained by 1.2% to Rs1299.
Insider Trades:
IVRCL Infrastructures & Projects Ltd: HSBC Global Investments Funds - A/c HSBC Global Investment Funds
(Mauritius) Ltd., PAC: HSBC Investments (Singapore) Limited has sold in open market 953150 equity shares of IVRCL Infrastructures & Projects Ltd on 5th June, 2007.
UFLEX Limited: A.R. Leasing Private Limited (part of the promoters' group) has purchased from open market 129158 equity shares of UFLEX Limited on 8th June, 2007.
Praj Industries Ltd: Shashank Inamdar, Managing Director has sold in open market 14350 equity shares of Praj Industries Ltd on 7th June, 2007.
Lower Circuit:
Bag Films, DCB, Ansal Housing, Ruby Mills and Raj Tele.
Upper Circuit:
MSK Projects, Godrej industries, Mascon Global, RPG Cables, GV Films, IKF Technology, Satra Properties and Yashraj Securities.
Delivery Delight (Rising Price & Rising Delivery):
3i Infotech, Ashok Leyland, Canara Bank, Carborundum Universal, Crompton Greaves, Dishman Pharmaceuticals, Exide
Industries, Geometric Software, HDFC Bank, Hero Honda, Indian Hotels, IPCL, IVRCL Infrastructures, Jain Irrigation, Maharashtra Seamless, SAIL and Sun TV.
Abnormal Delivery:
Dhampur Sugar, India Cements, Praj Industries, EKC, CESC, ABB, PVR, GVK Power, Jet Airways, LIC Hsg, Moser Baer, Mysore Cements, Nagarjuna Fertilizers and TV Today.
News Headlines:
April infrastructure output grows 7.4% yoy
GAIL says, no plans to issue bonus shares
Hexaware wins its largest ever APAC deal
Petron Eng gets order worth Rs235.7mn
Subex Azzure promoters to increase stake in the company
Glenmark to split each share into two
Yashraj Securities recommends 5:1 bonus and stock split
MSK Projects gets order worth Rs348.8mn
Petronet LNG to sign LNG contract with Qatar for 1.25mn tons
Satyam allies with JDA Software group
US Market heaves a sigh of relief on Friday
Global growth and rising interest rates in Asia and Europe put the U.S. bond market under pressure
After a modest start for the week ignoring the China stocks sell-off, US market plunged during the mid-week trading days during the past week. But at the end, it did try to recoup back some of the week’s loss. Nevertheless, all the three indices lost 1.6% - 2% going into close at the week’s end on Friday, 8 June 2007.
Unforeseen strength in the services sector and comments from Fed Chairman Ben Bernanke about housing and the economy dashed investors' hopes for a reduction in interest rates any time soon. The rate fears coupled with rising oil and higher bond yield rattled the US market between Tuesday, 5 June and Thursday, 7 June. Yield on 10-yr note soared above psychological 5% level for the first time since August. It reached a level of 5.24% but closed the week at 5.11%.
All the three indices incurred substantial losses between Tuesday, 5 June 2007 and Thursday, 7 June 2007. DJIx itself lost 410 points between those three days. Nasdaq and S&P 500 lost 77 points and 47 points respectively. But on Friday, 8 June 2007, lower oil price and partial stabilization of bond yields powered a rally in the market and the indices closed higher for the day.
The Dow Jones Industrial Average lost 244 points for the week. Tech heavy Nasdaq lost 41 points while S&P 500 lost 29 points.
On the economic news front, mixed batch of May same-store sales came out that were impacted in part by rising gasoline prices. First quarter productivity was revised down to 1% from a previous read of 1.7%, while unit labor costs were shown to have risen a higher than expected 1.8% from the 0.6% rate initially reported.
During the week, the acquisitions news that hit the headlines were – Flextronics announced that it will acquire rival electronics manufacturer Solectron for approximately $3.6 billion. Steel stocks got a major boost on Friday after ThyssenKrupp reportedly said it is interested in U.S. Steel. Avaya also confirmed during the week that it is being taken private.
Executive Summary
For the week, DJIx is down by 1.8%, S&P 500 is down by 1.9% and Nasdaq is down by 1.6%. While the interest rate action weighed heavily on investor sentiment in the past week, the deal-making that helped fuel the recent rally in stocks continued. For the year, the Dow is up by 9.7%, Nasdaq is up by 6.6% and S&P 500 is up by 6.4%.
During the week, investors became quite worried after the European Central Bank raised its benchmark rate 25 basis points to 4%. Though the same is well below Fed’s 5.25%, it bothered traders who feared that a hike, here, is imminent.
Next week has options expirations that might push stocks in either direction as investors decide whether to leave options alone or exercise them. On the economic data front, the government will report on retail sales on Wednesday, 13 June, wholesale price inflation on 14 June and issue its monthly Consumer Price Index report on 15 June.
Roman Tarmat IPO Analysis
Promoted by Jerry Varghese, Roman Tarmat provides engineering, procurement and construction services for highways and roads, airside works and other civil work. The company has also set up a ready-mix concrete (RMC) plant at Goregaon, Mumbai, with an installed capacity of 30 cubic meters per hour to cater to its captive requirement and four automatic stone crushing units to enhance its operational efficiency.
Roman Tarmat’s IPO is to fund long-term working capital requirement and invest in capital equipment. The price band has been fixed at Rs150-Rs175. The issue opens on 12 June and closes on 19 June 2007.
Strengths
- End April 2007, the order book was Rs 336.89 crore comprising un-commenced projects, unfinished and uncertified portions of commenced projects. The order book is to be executed over two years. Generally, 35% of the road projects are executed in the first year and balance 65% in the second year. The order book represents four times the reported March 2006 year ending revenue.
- End March 2007, about 9,456 km of roads were yet to be awarded under the National Highways Development Programme. As Roman Tarmat is one of the players operating in the road segment, it may see further increase in order book. Apart from this. the company is also likely to benefit from increase in investment in restructuring of existing airports and setting up green field airports.
Weaknesses
- Has claimed tax benefit of Rs 6.02 crore under Section 80IA in FY 2006, and Rs 6.3 crore in the nine months ended December 2006. The retrospective withdrawal of Section 80IA benefit may not only impact FY 2007 profit but also future profit until the orders bided taking into account 80 IA benefit are executed going forward. The Finance Bill 2007-08 has clarified that benefits of Section 80-IA (which provides for a ten-year tax benefit to an enterprise or an undertaking engaged in development of infrastructure facilities, Industrial Parks and Special Economic Zones) shall not be available to a person who executes a works contract. The company has also not included this benefit under ‘tax benefits available to the company’ in the prospectus.
- From FY 2003 to nine months ended December 2006, there was a gradual improvement in operating profit margin (OPM), from –0.8% to 12.4%. This was on account of increase in proportion of revenue from airside works. As a percentage of contract receipts, the proportion of airside works went up from 3% to 25%. However, in the pending order book end April 2007, the proportion of airside works declined to 13%. Thus, OPM may not sustain at current levels. OPM for road projects is 8%-10% and for airside works 14%-15%.
Valuation
Roman Tarmat’s net profit was Rs 8.15 crore in the nine months ended December 2006. Annualised EPS works out to 9.9. At the offer price band of Rs 150- Rs 175, P/E comes to between 15.1 and 17.7, respectively. Comparable and bigger players in terms of revenue --- Valecha Engineering and C&C Construction ---- are currently trading at nine months’ annualised recurring earning of around 15 times.
Rakesh Jhunjhunwala - Sensex may never go below 11,500 levels
In Part-I of CNBC-TV18's exclusive interview with trader & investor, Rakesh Jhunjhunwala, he shared his perspectives on global markets, on where the Indian markets have reached in this rally; the fact that he believes there could be a period of consolidation right now but he expects there will not be a deep correction from here on, not more than 10% as he classified.
In Part-II of the same series Jhunjhunwala told CNBC-TV18 that the investors are likely to see a range-bound market, and it is unlikely to see a major move either way. He sees consolidation and feels that the market may not move 10% plus or minus.
Regarding volatility, he feels that the market must expect corrections from time to time. However, he assured that the Sensex might never go below the 11,500 levels and the he sees the Sensex EPS at Rs 840 this year. He hopes that the US rates will come down and the domestic inflation, in India, may not go above 5%. For present, he feels that the government may have achieved its tightening target.
Excerpts from CNBC-TV18's exclusive interview with Rakesh Jhunjhunwala:
Q: What could be the potential risks to that kind of expectations?
A: We have earned Rs 730-740 last year. The expectation in the context of what we have done in the last 4 years is not extremely high; it’s only 15-16%; but this is on a higher base.
Risks can be many - it can be demand in the software sector it could be a depreciation of the rupee; but by and large, it should come through.
Q: Do you think either technology, which is almost a fifth of the Index or autos, which have started showing some distressed signs - they could derail these earnings?
A: Autos is a very small part of the Index, really.
There could be other sectors which would compensate; some of the banks could do very well, Reliance could surprise - refining margins are at all time highs, some of the refining companies could do better; ONGC could do better.
And we cannot look only at the Index - maybe Index is around 16 - it could be 14. But if you look at the larger context of the quality of the earnings, the general growth, the potentiality - you have taken twenty years to come to USD 30 billion of a software exports; the projection is that we are going to double that in the next three years. What kind of a kicker that means for every other industry in India, whether it is for hotels or for housing or for retailing or for real estate!
How I structure my investment; rather than looking at year-to-year growth, I invest in the business model. And over that business model, do I feel the earnings have peaked, whatever investments I have made? I feel that the peak is far from here.
Also in terms of valuations, I do not think that we have had peaked valuations; we are going to have something like ’92, maybe in the next four-five years and that is where valuations are going to be.
Q: Have you taken any cash off the table; since you spoke about investing in a business and riding it till you believe it has peaked - in any of your significant investments, have you booked profits?
A: I have booked profits in all my investments. But I have reinvested that in the market, except maybe, buying a house or some small other assets. All my wealth is in equity and if I get money, I would put it back into equity.
Q: Not fixed maturity plans and stuff like that?
A: I have some Rs 40 lakhs lying in the public provident fund. Apart from that, I pay interest; I do not earn any interest.
Q: But in your top five businesses that you have - investments in stocks like Titan, Praj; you don’t believe they are anywhere close to their earnings peak yet?
A: They are surely not close to their earnings peak.
Q: Valuation peak?
A: Valuation peak, may be; but I personally feel in some of the investments, I don’t know whether Titan or Praj, earnings growth are going to really surprise on the upside and if the earnings growth is going to be extremely high, then the growth in the value of the investments - even if the valuations remain what they are, surely in some of my investments, I don’t expect the valuation or the P/Es to increase. But if the earnings growth is going to be very good and P/Es are maintained, then the appreciation can be quite good. That is at least what my hope is.
Q: You spoke about being surprised on the Budget day - the biggest nasty surprise was construction. Did you change your view at all on that sector, which you have been very bullish on after what came through on the Budget; and any of the interest rate concerns that are bounded?
A: No; effectively, you increase a dividend tax after such buoyancy in revenue - to have an increase in the dividend tax; and also the negative international factors played out a very big role just prior to the Budget day.
But those negative international cues; the expectation was that there will be a corporate tax cut. There was an effective increase in corporate taxes. I think that is what really disappointed the market.
Of course, the overall fiscal picture was very good and it has turned out to better than what he (the FM) had projected also. I was reading the Business Standard today in the morning; the growth in direct taxation in the first two months this year is 70%.
Q: What about construction as a sector, have you changed your views at all?
A: What has happened in Indian infrastructure? China added 1,10,000 megawatt of power last year, we added 8,500 megawatt.
This is the situation of the order book of our construction companies. When I think, the investment needed in infrastructure today is not 10% of what I think we will eventually have annually, after 4-5 years. I have retained my investments in Nagarjuna and in Punj Lloyd. I am bullish on this sector.
Q: You don’t think interest rates or margin concerns will derail growth or earnings visibility for this sector?
A: What has interest got to do with it?
Investment in infrastructure is going to take place, it’s at a very initial stage. There are big entry barriers in this sector. Although one negative aspect of this sector is that it is very capital intensive. But there are big entry barriers in terms of qualification, project management skills and I think there is going to be very good growth.
Q: What about oil? You said that refining margins are at an all-time high. How do you see crude panning out because the refining marketing companies are still laggards - HP, BP, IOC, all of them?
A: That is because of the subsidy policy of the Government of India. I personally, on oil price, I feel the range is between USD 50-70. I think ultimately price will be closer to USD 50 than to USD 70/bbl
Q: You have any investments in the oil sector?
A: None.
Q: What about other commodities like metals? I believe you turned quite bullish on Tata Steel after the hammering of stock post Corus?
A: Yes, if Tatas can bring the consolidated margins to 25%, then the kind of profitability they can do it on equity of 800 crore or the kind of profitability (they are) talking, is unbelievable.
In general, I feel over a period of time, commodity valuations will go up. Today, if you see, all commodity stocks they have valued at six times to seven times.
But with the increase in commodity prices, the base prices of commodities - the base valuations of commodities, stocks will go up; and they have done it in Tata Tea. What I feel personally is, as an investor, I will wait because the real efficiencies are going to take three years to kick in and three years is a long period of time.
Q: So you won’t buy now or would you buy, hold and wait - what are you saying?
A: I will wait but I will be alert.
Q: Your call there is on the management or on the steel cycle as such?
A: It’s more on a management than on a cycle.
Q: Are you bullish on the steel cycle even from these levels?
A: I don’t have much of ideas; I have only one investment, which is Bhushan Steel. In general, I think oil prices are going to remain good; they are not going to go down to the levels which people talk of.
Q: As an investor, have you ever taken a big contrarian kind of call? Or do you just identify growth businesses and stay with them for a long time? Sometimes do you think that nobody likes this sector? I think eventually value will emerge; it’s a good time to buy in and wait - have you ever approached investing like that?
A: I don’t know that. I think my whole call in 2001-2002 was a very contrarian call; most people were bullish.
The dogmatic emphatic bullishness that I have would be India and equity market itself is a contrarian call because I don’t think many people share it really and genuinely.
When markets are up, they all say - no, India is going to boom. But the moment there is weakness; everybody is out with a sword.
I don’t think in terms of contrarian or non-contrarian. If I think the stock has got prospects and the valuations are attractive, I will buy.
When I bought Praj, it was very difficult decision because in January of 2003 the price was Rs 10; I bought the stock at Rs 100 in December 2003. So the stock had appreciated 10 times in a period of one year before I bought the stock.
So, I don’t know; stock appreciated 10 times is a vast appreciation and I bought after that. So I am not buying anything to be different. I am only buying it if in my thinking, the earnings will grow and valuations are reasonable.
Q: Do you sometimes fear that your vision or investing wisdom might be clouded by your innate bullishness that you may have failed to spot some danger signs when they are coming up?
A: I am not an innate bull. I have made some of the biggest money in my life by being a bear, right?
Q: But that’s pre-2000 right?
A: Yes. But the qualities I have as a human have not changed after ‘pre-2000’; this is the same Rakesh Jhunjhunwala.
Q: In this whole bull run, from the mistakes that you have made in investing, have you learnt a lot or have you approached investing differently from the few stocks, which have not quite worked the way you thought they would have worked out?
A: I think what I have learnt in the last four years is more than what I have learnt in the previous 43, because whatever has happened in the last four years, has led me to a lot of introspection. I have realized that some of the worst mistakes I have made, (are) in the best of the times.
Q: Give us a couple of examples.
A: In the sense, that god has been kind; my portfolio has really appreciated in the last four years. Sometimes that could lead me to extremely high commitments or try and feel that whatever I have done is right or that why should I review what I am doing? But, in fact, I feel I have now become more careful and more alert than ever.
Q: Are you saying that at some points your arrogance has crept in? You think you are bigger than the market.
Q: But has it crept in?
A: Never. The first thing I learnt from Mr. Radhakrishna Damani from whom I learnt so much, that the market is supreme. So we never approach the market with the thinking that what we are thinking is right. When we go there at 10 o’clock, what the screen is doing is right. But the biggest lesson I have learnt also, is that I should approach things without prejudice.
Q: Is it difficult to do? Easier said than done.
A: I think it is easier said than done. Also, what happens, that sometimes if you have been right, you tend to be dismissive. Not tend to be dismissive of the market, but tend to be dismissive about some ideas which you have.
Maybe I was dismissive of real estate 15 months ago, right? That no, I don’t want to invest in this sector. I think I should have paid greater attention. But I console myself with the fact that this quest to learn as an investor is a journey, not a destination.
Q: Has it happened in the last four years that sometimes you have closed your mind to an opportunity too early and have missed out on an opportunity?
A: That has happened and it happens all the time. In fact, in the technology boom - because I am not computer savvy myself, I never understood what software was, I never made the attempt to understand what it is; because I only understood in 1997-1998.
Q: You were telling us about some of the other lessons, what else it taught you?
A: The other lesson is that do not expect that you will have this kind of return constantly. Some of the worst mistakes are made when you get an abnormal return and then you start feeling that you must take steps so that this return can be replicated. We must realize that these returns have arisen also because of external circumstances, which may not be prevalent today.
And therefore, all of the investors must realize that returns in Indian equity are now going to dilute. The low hanging fruit has been taken. But still I think returns are going to be better than lot of other asset classes. And if I see the risk profile, I think Indian equity may still offer the best returns over a period of time.
Q: But what you are saying does not gel very well with your prediction that in three-four years, there will be mass hysteria and euphoria in the market - 15% annualize for the next three years would not lead to mass euphoria; do you see a blow out at the end of this run then?
A: I hope we will have better returns on that.
Q: You think it will be little more than 15%? I am not talking about you as an expert investor, but for people who are less sophisticated and more passive in their investing styles?
A: I do not know about them.
Q: How can everybody generate a Praj and a Titan kind of returns every year? You cannot be the benchmark for the average investor?
A: No, but I personally feel that there could be a consolidation in earnings growth this year.
But I think we will have better earnings growth post-2007-2008. I am personally of the opinion that economic growth in India will kick off to double-digit figures; it may take twenty-four months. I see no reason why we should not.
We are a domestic base consumption story; now we got to go in the investment move and these capital investments combined with the consumption, should take us to 10% double-digit growth.
We have very low FDI levels of investment; our saving rates are going up.
Q: Where do you see politics in the midst of all of this; next couple of years that’s one constant refrain that we won’t see too much by way of reform where they are leading upto another general election - does it worry you?
A: No, we talk of reforms; Mr. Chidambaram made a very important observation after the Budget. He said my growth in tax collections budgeted this year, is more than what my tax collections have been in five years.
Was it possible India without reforms?
We are coming to GST, Goods and Service Tax; I know in some of the consumer durable companies, companies will save upto one-one percent by GST logistics. So there is going to be infrastructure dividend; there is going to be logistics. So I don’t see there is no reform in India, only maybe the pace is slower than what we desired and as far as politics are concerned, I think it is immaterial.
Look at the way Mayawati has changed; I think it is very important she wants to make an all-inclusive India; means, she wants to carry everybody with her. So ultimately, whether Jayalalitha or Mayawati, it’s not going to make much difference as long as they don’t have communist support. I only wish we have a government in which there is no communist support. I don’t think politics is really going to disturb India’s economic story.
Q: What is your expectation for the next three quarters? Would you be surprised if the Index broke 12,000 on the way down?
A: Nothing in the market ever surprises me.
Q: Are you expecting it to happen?
A: I cannot say that it will not happen. It could break those levels, but in the absence of earnings. Damage to earnings growth - I don’t think it’s going to retain that loss; it will bounce back. You went to 8500 levels and you bounce back. So I feel, it could break. But if there is no earnings damage, I think it will bounce back with vengeance.
Q: What could break it then - some liquidity contraction, global even; what is the potential risk to this market, which can break it below those supports?
A: Anything can happen, maybe fears about worldwide economic growth abrupt appreciation of the rupee, maybe some political event in India; lot of things would kick it up. The biggest protection I think the market is having against a big fall is that people are not going in for extreme commitments. You are not seeing that kind of commitment in the market, which we saw in 2005.
Q: You don’t find the futures market terribly overbought or leveraged right now?
A: Not at all; when Reliance was at Rs 700, it had got 2 crore shares outstanding. At Rs 1600, it has got 60 lakh shares outstanding. In a market with this kind of market cap, what is the futures commitment of Rs 30,000 crore?
I don’t look at the Index and don’t look at the options; I only look at the plain stock futures.
I don’t think in the cash markets, there is any extreme commitment, because there is no extreme belief itself; nobody is telling me that sell your wife’s bangles and buy stocks.
So you have this big mighty falls and whatever falls we have had in the last three days, in two days the FIIs have sold 3100 crore of Index futures and I think they are going to sell another 1000-1500 crore today also. So there has been substantial amount of hedging and short selling also.
Q: Would you be surprised if the Index went on to break 16,000 this year?
A: It’s a tall order, but I won’t rule it out.
Q: What is your expectation - nothing can be ruled out in a market?
A: I have no expectations. I have an investment. I am confident about the economic growth in India and about the profit growth in those companies. I think valuations in India have not peaked. If my company is constantly growing profit, their size grows, then PEs will grow. So Indian PEs will grow because of size and constant growth in profit.
It is that feeling then; I am retaining my investments and I have absolute confidence there. Not that I don’t have right to change my opinion; I can always change my opinion and I approach the markets everyday with the scare. I also don’t know what’s going to happen in the markets tomorrow. I know only as much you know and we trade with price there. So I won’t be surprised, I won’t rule out anything.
Q: But are you getting that sense looking at the screen that this year we could form a significantly higher top from what we have formed already?
A: It is difficult this year itself. But I won’t rule it out.
Q: But 2008, you think will be a better trajectory for the markets?
A: I don’t think so; the slow down in the auto industry and the worrying thing is slow down in commercial vehicle industry.
Cars have done well and will do well. Let’s see, it is in very initial stage. If interest rates ease, then demand could shoot back in the commercial vehicle industry.
Q: On balance, you are bullish?
A: I am bullish, absolutely and my commitment reflects.
Q: Both long-term and short-term or short-term skeptical, long-term bullish?
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