The Hindu Business Line : Market on the move

AS EQUITY PRICES move up towards the record highs that were set early this year, higher input and financing costs are casting a shadow on corporate profitability from the second half of 2004-05. The optimism generated by the bullish phase of the past three months could soon be tempered. Interest rates are unlikely to go down any further. Even home loan rates have been raised by half a percentage point. These factors point to lower earnings growth over the next few quarters, into early 2005-06. The across-the-board bull run of the kind witnessed last year appears unlikely, though certain positives can drive up valuations selectively.

There are no indications of commodity prices heading lower. The Chinese economy continues to , guzzle resources as it powers its way at an annual rate of 9 per cent-plus. Brakes have been applied but with modest success. Several commodity stocks will continue to do well because the excess production capacities created in the past are being better absorbed. The auto sector — the other key driver of the 2003 bull run — too appears to be ticking well with impressive growth rates even on a high base, especially in the four-wheeler segment. Here, the higher metal prices are bound to impact profitability sooner than later, as also volumes. Information technology, textiles and pharmaceuticals appear to be having growth momentum without a major risk to profitability. For textiles and pharmaceuticals, sentiment could get a boost from the significant changes ahead in the operating environment, as India meets World Trade Organisation obligations.

The market has acquired greater depth with several quality initial public offerings and higher float in public sector unit stocks, following the successful disinvestment earlier this year. The bull run of the last 21 months has also seen quite a few mid-cap stocks achieve large-cap status, delivering considerable value to shareholders. The mid-cap space, too, has expanded, with several pharma, auto-ancillary and textile stocks sectors moving up the market capitalisation chart. That this has made the Indian market more attractive for foreign institutional investors is evident from the FII flows; at $5.75 billion so far in 2004, they have been massive for second year running. Much of this has come into the big-ticket offerings of ONGC, TCS, ICICI Bank, NTPC and the PSUs in which disinvestment happened. This also explains the muted effect of such fund flows on the secondary market, unlike last year. If domestic interest picks up in equities and if the Government can deliver on the infrastructure and reforms fronts, higher valuations may be here to stay. The party pooper could be higher crude prices to which the economy and Corporate India must learn to adjust, no matter that they are now down 15 per cent from the record highs reached over the past two weeks.