The Hindu Business Line : Party time at Dalal Street

Political stability, improved relations with Pakistan, a low-interest regime coupled with a strong growth in the economy, are all positive indicators that have sent equity indices zooming. But a sure proof of good times is the Dalal Street food vendor saying, "Dhandha aaj kal achcha chal raha hai."

The atmosphere on Mumbai's Dalal Street these days is different after 3.30 p.m., when the stock market comes to a close. More snack-stalls have come up on the street and all of them are doing brisk business. "Dhandha aaj kal achcha chal raha hai (Business is good nowadays)," says a stall-owner selling sandwiches. But the scene was not the same early this year.

So what does it mean for the stock market? For fundamental analysts it does not convey anything, but ask any old-timer on Dalal Street and you'll get this reply. "Whenever the stock market is bullish, traders spend more on their snacks after the market hours, and this is a sure fire indicator that they have made good money on that day," says a BSE broker.

However, every bull rally in the past has been punctured by a scam leaving Dalal Street deserted. So this time around too, in the current rally that started in April 2003, this is the major concern for the market players, especially the retail investors. "There has always been a concern among the small investors whenever the markets have moved sharply," says Abhay Aima, Country Head (Equities and Private Banking Group), HDFC Bank.

When the BSE Sensex moved from 3,000 to 5,000, the investors thought that the markets were overpriced. The result of this perception has been that most small investors have sold their shares on every rise of the market, fearing that the market is likely to fall. Between April and September this year, the public holding in most of the Sensex and S&P CNX Nifty has come down. Most of the selling by individual investors was absorbed by FIIs that have pumped in over $5.5 billion so far this year, the highest inflows in a single year.

The interest that the equity market saw this year came from the fact that most of the scrips were highly under-valued. "There was a complete mis-valuation as dividend yield of a large number of stocks was higher than the yield on the safest debt paper available in the market and in the first phase this was corrected," said Aima. The year, which began with the rise in the stock price of public sector banks, was mainly driven by their attractive dividend yield. In public sector banks like the Andhra Bank, Bank of India, Oriental Bank of Commerce, and others, the dividend yield was over 6.5 per cent, much higher than the interest rate offered by these banks on one year fixed deposits. There was also a very interesting turnaround in some big companies such as Steel Authority of India, Arvind Mills, Jindal Vijay Nagar and Essar Shipping. The number is much bigger for small- and medium-sized companies. Some other factors that brought interest in the equity market included restructuring exercises undertaken by various companies. The impact of this was seen in the March 2003 results and in the first half of this fiscal. Good monsoon and a booming commodity market also added to the bullish sentiment on the stock market.

As though that were not enough, the political environment became better than what it was in 2000, when the BSE Sensex had touched its highest levels. At that time the Vajpayee Government was being held to ransom at the drop of a hat. But today, not only is there much more political stability, the relations with Pakistan have improved too. Add to this, the recent elections in four States in the Hindi heartland giving a thumbs-up to the BJP. Says Ambarish Baliga, Vice-President, Karvy Stock Broking, "Overall, the investment environment is positive and there are very few negatives in the market."

The foreign investors that have been the key drivers of the current rally feel there is immense potential in emerging markets like India and China. Other than the macro economic environment, these countries are also the bases for outsourcing of material and services by multinationals. So along with these companies, the fund managers have also started looking at India more seriously.

Says a report from the investment-banking firm Morgan Stanley: "Emerging markets are benefiting from the accelerating trend toward outsourcing. This has resulted in growing interest from investors not dedicated to emerging markets, focus on countries such as India and China that are at the fulcrum of this trend. Non-dedicated investment has been further supported by the increased ability to analyze emerging market companies side-by-side with developed-world counterparts like global pharma team's analysis of India's industry."

But as the indices head northwards, is there another scam in the making?

Not really, point out stock market pundits. They feel that the current rally in stock prices is not the same as seen in the past few rallies.

Says Birla Sunlife Mutual Fund Head of Equities, Paras Adenwala, "There is substantial difference in the current rally. There is widespread interest ranging from large cap to medium and small cap companies and this shows that there is depth in the market."

At a time when the BSE Sensex has gained by around 67 per cent since April 2003, broader indices such as the BSE 500 index or the NSE's S&P CNX Midcap index, have provided returns of over 80 per cent during this period. Regulation of the market both by the stock exchanges and the Securities and Exchange Board of India (SEBI), has been very strict. The best example of the alertness of the market regulator was seen in August this year when a large number of small cap companies stocks started moving. At that time, SEBI asked the stock exchanges to put more than 500 stocks in trade-to-trade segment (in this segment netting is not allowed) mainly to curb price manipulation. On occasion, the stock exchanges have been strict on imposition of additional margins on stocks that are witnessing sharp rise in price.

However, points out Baliga, the biggest concern that could affect the market mood is the Telgi Scam. "If there is some link of Telgi with the stock market, that could be negative for the entire market."

Another factor impacting the stock market is black money floating into the bourses through the FII route. A recent SEBI investigation raises some fear that after some Overseas Corporate Bodies (OCBs) were debarred from investing in the secondary market, their money might be floating in the market through some of the FIIs. Under normal course, the rise in the secondary market is followed by activity in the primary market. However, this is yet to be seen. There have been few IPOs such as Maruti Udyog, UCO Bank, Vijaya Bank and Indraprashta Gas, but little beyond that. Only a few more IPOs of companies such as TV Today and, Patni Computers are expected in the near future. The uptrend in the economies of a developed market like the US and rise in interest rates in these economies could lead to slower inflow of FII money into emerging markets like India and that too may spoil the party.

Dalal Street pundits do not agree with the view that the Sensex at 5,000 levels is overpriced and hence a crash is inevitable. They point out macro economic indicators such as low inflation and interest rate, the economy growing at over 7 per cent, and the like. They expect new opportunities to unfold through policy initiatives. "With the elections in four states over, the Government will go ahead with various economic reforms and that will be a great positive for the markets," says Nikhil Thacker, Asst. Vice-President (Research), Asit C. Mehta Investment Intermediaries in Mumbai. There are several Bills pending in the Parliament and among the most important for the stock market would be the passage of Amendment in the Banking Regulation Act that would allow for a hike in FDI from 49 per cent to 74 per cent in banks, and removing the voting rights.

There is hope that public savings invested in State-run enterprises will be unlocked (through disinvestment) to meet the larger goal of fiscal consolidation. The market feels that though during this year there has not be any big-ticket disinvestment (other than Maruti), and with Supreme Court likely to review its decision on disinvestments of HPCL and BPCL, any positive development on this score is likely to put the stock market on fire. The other good news is that key legislative bills relating to power and airports have been enacted this year, laying the foundation for capital formation in the medium-term. And, they come at a time of record low cost of capital, suggesting that the risk appetite should manifest soon. In roads, telecom and ports too, market assessment and viable business models are now established and the pace of activity is set to accelerate, feel experts.

Some other positive triggers that could take the indices ahead would be the impact of the monsoon. The poor monsoon last year had adversely affected the profitability of FMCG companies and this was seen from most FMCG stocks under performing the overall market. For instance, index heavy weight Hindustan Lever gave a return of just 8 per cent this year compared to the Sensex increasing by 55 per cent. Similarly, ITC gained 35 per cent this year and under performed the index. But these stocks seem to be catching up.

But if you think that the new year too will bring returns like this one, be cautioned. "Hence forth the movement in the stock market will be more performance driven rather than sentiment driven," says Aima.

"Investors should take a cautious view of the market and should book some profits on every rise," advises Thacker.

Baliga advises investors to keep a strict stop loss and keep rotating their money in several stocks, considering an annual return of 25 per cent to be good in the current environment.

There are equity experts who believe that as investing in equity is a very complex exercise, and requires both expertise and constant monitoring, small investors would be better off investing in equity through mutual funds than buying stocks directly.

While most people are bullish on the market, an old timer on Dalal Street says the best indicator of this is that he is yet to get investment tips from the food vendors on the street that houses the BSE!

Picture by Paul Noronha

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