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S. Vaidya Nathan

Mr Pavan Sachdeva, promoter of MS Shoes East (left), and Mr G. N. Bajpai, Chairman, SEBI. The former was responsible for puncturing the bull market of 1994-95. The latter now presides over a market where disclosures have improved tremendously.

THE current bull phase, which appears to have momentum left still — despite a long-overdue correction — has been so broad-based as to make difficult zeroing-in on any sector that has missed the bus. In its breadth, the current bull phase is similar to the one in the mid-1990s, with such common threads asforeign institution investors' (FII) interest and healthy support from buoyant commodity markets.

But in such key areas as trading systems, valuation levels, IPO activity and retail investor participation the differences are not only stark, but also give a stronger impetus to the bull run of 2003. The downside risks to the bullish phase are also different (see accompanying article).

FII interest: This has been a key driver of stocks over the past six months as the FIIs have lavished about $6 billion — the highest net FII inflow in over a decade — on Indian equities.

If the quantum of FII investment has been the ballast now, their emerging interest led the bull charge nine years ago. A modest presence in 1992 and 1993 was followed by exuberance in 1994 and 1995, when the FIIs invested about $3 billion.

FII strategy: `Buy India' was the dominant theme till mid-1995. Size in terms of market cap, sector, background of promoters, quality of management, credibility of earnings numbers and growth prospects were not the key variables in their decision process.

That Morgan Stanley Growth Fund, launched in January 1994 when the bullish phase was just starting, had a portfolio of about 350 stocks within two-and-half months offers an insight into the FII strategy.

`Buy ICICI, IDBI and IFCI, as they offer a one-stop window to participate in the growth of the economy and the corporate sector' was another example of the FIIs' blind faith in Indian stocks. This approach also led them to pick up shares of Indian companies at fancy prices, even in the overseas market.

The list included quite a few with no credible, underlying story. It was also routine for stock prices to be ramped up ahead of Global Depository Receipts (GDR) offerings, a trend that still persists, though less pronounced, as new FIIs enter Indian markets.

But from mid-1995, the FIIs became wiser to the ways of the Indian market and practices of promoter groups, though they still pick up equity at outlandish prices. For instance, Goldman Sachs picked up Zee Telefilms at Rs 1,000 per share in 2000-01. However, these are exceptions as the FIIs have become more selective.

They have also become big-time traders, which has helped mask, to an extent, the stocks that attract their attention. In the mid-1990s, it was not difficult to gauge the stocks that held them in thrall. Front-running by market operators, who picked up equity in anticipation of FII interest, used to be the norm. This still happens, but the FIIs have managed to reduce it to an extent by their trading activity.

The new NSE Plaza and the BSE building on Dalal Street. The NSE dominates the equity market now and deserves credit for improving trading systems. The BSE is a distant second, in contrast to its near-monopoly of the mid-1990s.

Domestic institutions: The UTI and SBI Mutual, to a lesser extent, were the only domestic funds of any consequence. As LIC used to be in lock-step with the UTI on stock selection and timing of buying and selling, it was not a factor. This 1990s bull phase, incidentally, masked the incipient signs of weakness in the UTI which, creeping up by 1994, engulfed it, resulting in large-scale losses between 1998 and 2001.

In the last two years, UTI Mutual, which is without the baggage of US-64, and a host of assured return funds, have made a good comeback; a host of private sector mutual fund houses offer choice to investors; and some ten funds have even built up an impressive track record over a long period. Their scale of operations may pale compared to the FIIs, but they cannot be dismissed as insignificant.

Retail investors: The bull phase of the 1990s attracted retail investors in hordes. The quick and big gains during the Harshad Mehta boom of late 1991 and early 1992 was fresh in their memory.

As soon as the market showed signs of a bullish undertone in January 1994, than investors came in in droves seeking quick and sizeable gains. However, the pain that ensued, especially with primary market offerings skimming away thousands of crores of rupees, continues to keep many retail investors away from equity. Not even an 80 per cent jump in equity valuations over the past 15 months could lure them back.

Yes, mutual funds have been attracting higher inflows over the past three months. But this has been matched by investors cashing in on the uptrend. Interest in day-trading is fairly widespread, but bears no comparison to that in the mid-1990s.

Enhanced exposures to global markets was in the mid-1990s seen as a threat by players in industries such as steel. Now, they are viewed as a big opportunity, especially for the auto component, IT and pharmaceutical sectors.

Primary-market boom: Making an IPO had become a business in itself, with a few thousand companies — most without any underlying business — tapping the market. Equity was raised at fancy prices thanks to the freedom in pricing.

Only a few projects, such as Reliance Petroleum and Jindal Vijayanagar, which were partially financed by the IPOs of those days, have gone on stream, and that too after extended delays. The funds raised by most IPOs enriched private interest even as the stocks faded out of the trading radar. The public offer of equity by MS Shoes East, owned by Pavan Sachedeva, collapsed as its shenanigans were exposed. It also stopped the bull in its tracks, with the MS Shoes crisis bringing trading on the Bombay Stock Exchange to a halt for some days. MS Shoes and Mr Sachdeva have remained the visible face of the widespread malaise that ripped off investors in 1994-95.

However, the tightening of disclosure and listing requirements and, more important, lack of interest on the part of investors have all but ended the spate of dubious IPOs. Trying to ride the bull phase, a couple of outfits did try for investor support recently with the promise of listing on a regional stock exchange where norms are not stringent. IPOs by companies with a credible business card, such as Maruti and Indraprastha Gas, have attracted considerable support. A part of this interest may be driven by the bullish undertone in the market and the scope for gains when the stock is listed.

The primary market is no longer the unpredictable needle that can puncture the bull phase as it did in 1994-95. Encouragingly, the IPOs by well-established companies such as TCS, Patni Computers, TV Today, NDTV and Biocon, to name a few, appear set to add depth to the market.

Healthy pointers: The current bull phase rests on a stronger footing compared to the 1994-95 run for the following reasons:

Electronic and paperless trading and settlement systems have now become a benchmark for other markets. The National Stock Exchange (NSE), which was a fledgling four-month-old platform for equity trading, when the 1994-95 bull market came apart, has raised the bar consistently and, with regulatory support from SEBI — especially in the area of disclosures and dematerialisation — made the market a safer place as far as trading risks go;

Even as trading is concentrated in the top 50 stocks, mid-cap stocks such as Indian Rayon, BEML, Divi's, Nicholas Piramal, Sundram Fasteners, Thermax, Sundaram Clayton, Kotak Mahindra Bank, MICO and TVS Motor appear well-placed to add depth to list of large-cap stocks;

The enhanced interest in PSU stocks, including those of banks, has also added depth to the market, and made up for the delisting of numerous MNC stocks that were at the forefront of the 1994-95 boom. An offer-for-sale of Container Corporation's stock at Rs 67 struggled to go through then; now the stock, which trades at about Rs 600, is highly fancied by investors, reflecting a change in perception on PSU stocks;

The bull market of the mid-1990s, driven by the misconception that equity carried no cost and unrealistic profitability and cash flow projection by lenders, led to a capacity creation binge whose ill-effects are still at play.

The prospect of a better demand-supply balance beckons in cement, steel, paper, petrochemicals and a range of chemicals, as consolidation and weak price trends over much of the past five years have weakened marginal players, and, importantly, led to a disciplined approach towards creation of capacities.

The corporate sector is leaner and meaner now, with the focus on cost control, and the restructuring of operations over the past five years adding a few crucial percentage points to operating profit margins. Lower interest costs have also bolstered earnings and driven demand in key areas such as housing and automobiles. As a result, valuation levels are not as stretched as they were in September 1994, when that bullish phase ended.

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