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Nath Balakrishnan

AT THE beginning of 2003, when the Sensex was perched at the 3,400 level, had someone hazarded a guess that it would settle at almost 5,700 by the year-end, the most likely response would have been: "That's bull." As we approach the end of the calendar year, we realise that the phrase, ironically, would have had a prophetic ring to it.

We take a look at the key themes that not only ensured that the stock market rocked this year, but also set it on a roll.

ACQUISITIONS: 2003 was a year that saw Corporate India unveil ambitious growth plans through the inorganic route, as quite a few Indian corporations got busy gobbling up companies abroad as well. Key among them were Bharat Forge (which acquired Carl Dan Peddinghaus, Germany), Reliance (FLAG Telecom, US), Ranbaxy (RPG Aventis, France) and Infosys Technologies (Expert Information Systems, Australia). Expect more action on this front in the year ahead as companies consolidate, tap global markets and seek scale economies.

BEARS: They have had an eminently forgettable year, bruised and brutalised by the marauding bulls. Investors could be pardoned for having forgotten their existence this year.

COMMODITY PRICES: Robust demand from China, especially for coal, iron ore and steel, to name a few, has had a salutary across-the-board impact on commodity prices.

The biggest gains were in steel, with Tata Steel and Steel Authority of India lapped up in a big way.

Shipping companies such as GE Shipping, Shipping Corporation and Essar Shipping also benefited as Chinese demand pushed up freight rates sharply.

Chemicals are the other area where big-ticket gains drove performance and also the prices of Reliance Industries, IPCL, Clariant India, Jubilant Organosys, Bihar Caustic and Thirumalai Chemicals, to name a few.

DERIVATIVES: Into their third trading year, the derivatives market saw an explosion in volumes.

Trading volumes in futures and options (F&O) market are often twice as much as that in the spot market; the turnover in the F&O segment has also seen a three-fold rise, to about Rs 2,00,000 crore, in December compared to that in January.

A widening of the list of stocks on which F&O trading is allowed (with banking and oil sector stocks being prominent additions), and the enhanced usage by FIIs to take up positions in the derivatives market to hedge their portfolios have propelled trading.

ECONOMY: A good monsoon, low interest rates, the availability of auto and home loans at competitive rates, moderate levels of inflation and an embarrassment of riches on the forex reserves front have converged to ensure that GDP growth will be 7.5-8 per cent for FY04.

The boost that this provided to corporate earnings and the overall feel-good factor have buoyed the equity market.

FIIs: Inflows from this set of investors hit an all-time high, as they touched $7.5 billion.

It is hardly surprising that the markets moved the way they did on the back of such a strong inflow, as FIIs could simultaneously capitalise on the depreciation of the dollar vis-à-vis the rupee.

Institutions that have strengthened their presence in India are Fidelity Investments, T. Rowe Price Associates and Janus. The increase in the number of large FIIs investing in Indian stocks is a good augury.

GLOBAL LINKAGES: Lowest interest rates in the US over the past 40 years, revival in economic activity in the US economy with a GDP growth of 8.2 per cent (a 19-year high) over the July-September quarter, signs of a sustainable recovery for the first time in more than a decade in Japan, a firm undertone in European economies over the past three months, and the growing preference for emerging markets have influenced Indian equities positively.

HERD MENTALITY: A market as strong as this attracts even investors who have little understanding of the risks attached to equity investing. Acting on a tip from the neighbourhood broker or on so-called sensitive information, such investors, too, has played a role in sustaining market tempo.

When such investors enter the market in droves, the nature of stocks that get catapulted into the limelight also turns bizarre. Just look at some of the third- and fourth-rung stocks that have soared to get an idea of how a bull market can mow down established canons of equity investing.

IPOs: There were a few opportunities to make a killing in the primary market, too. Investors in Divi's Laboratories, which hit the market in February, will now be sitting on gains of close to 950 per cent; an investor in Maruti's IPO would have made a neat 180 per cent.

TV Today and Indraprastha Gas were a couple of other notable IPOs. The trend is set to continue into the next year as well, with possibly an IPO from the big daddy of them all, Tata Consultancy Services.

Closer at hand is the sale of equity by the Government in ONGC and GAIL.

JACKPOT: That is what investors in the current market would have hit. For investors in select mutual funds, there has been even greater cause for cheer. Funds such as HDFC Equity, Franklin Bluechip, Prudential ICICI Tax Saver, Prudential ICICI Power, Alliance Basic Industries and Franklin Prima have returned well in excess of 100 per cent this year.

Equity investors taking the mutual fund route have never had it so good.

KNOWLEDGE KICKER: The performance of pharma stocks came as a shot of adrenaline to the market. And, unlike the previous rally, MNC pharma stocks were not to be left out this time round.

The performance of key Indian pharma companies, such as Ranbaxy, Dr. Reddy's, Sun Pharma and Cipla, cannot be considered spectacular, they were stable nevertheless; pharma MNCs such as GlaxoSmithKline, Aventis, Wyeth Lederle and Novartis came out with their guns firing. However the pharma majors were overshadowed by the likes of Aurobindo, Shasun, Matrix, Nicholas Piramal and Lupin driven by perceived strengths in targeting global markets.

Noticeably, the worst also appears to be over for the IT sector. Stocks such as Infosys Technologies, Wipro, Hughes Software, HCL Technologies and Satyam Computer, to name a few, performed strongly, especially over the past three months. Their participation has been a subtle, yet vital, contribution to the rally.

LIQUIDITY: If FII flows were the pivot, the funds pumped in by market operators, retail investors and day-traders (who would have had a field day, as guessing the direction of the market movement was getting to be a no-brainer) provided an impetus to liquidity and played a crucial role in sustaining the momentum.

MID-CAPS: Undoubtedly, the biggest story of the current rally. A combination of attractive valuation, better visibility of earnings and a high degree of institutional investor preference pushed many stocks in this category to a different orbit.

Matrix Laboratories, IPCA, Lupin Labs, Sundram Fasteners, Sundaram Clayton, Thermax, Blue Dart, LG Balakrishnan Brothers, Orchid Chemicals and Indian Rayon, to name a few, are cases in point.

NEW ALL-TIME HIGHS: In the bull market of 1992, 1994 and 2000, stocks that were largely unheard of kept scaling undeserving heights.

A look at the quality of stocks that have touched new peaks places this bull market in a different league. Reliance Industries, Grasim, MICO, Siemens, HDFC Bank, HDFC, Corporation Bank, Bank of Baroda, Reliance Power and TVS Motor are all trading now at rarified levels.

OUTSOURCING: A theme that started off in the IT sector now encompasses the pharma and auto-components segments too. As global companies grapple with devising innovative methods cost-cutting, outsourcing is increasingly becoming mainstream.

And India, with its combination of technical expertise and the advantage of lower cost, is a logical destination to head for. Already, Indian companies are doing work for top-of-the-line multinationals and are being rewarded by the market, too. Examples are Divi's Labs, Shasun Chemicals, MphasiS BFL, Cummins and Sundram Fasteners, to name a few.

PSUs: Market fancy for this class of stocks has never been better. The likes of BHEL, BEML, Dredging Corporation and Bharat Electronics have been marked up sharply.

ONGC's price has more than doubled this year and its market capitalisation has crossed the Rs 1,00,000-crore threshold.

(The last time the market cap of an Indian company crossed this level was when Wipro passed this threshold at the height of the tech bull-run in 2000. However, it stayed above this level only for a few days).

QUALITY: As investors step into the market even as it reaches new highs, it appears that they are treading the path of caution, preferring to invest in quality offerings rather than hunt for the next multi-bagger in the making. This will provide a certain cushion to the downside risk.

RESTRUCTURING: An overhauling of product portfolio, focus on key brands, reduction in manpower levels, thrust on cost-control, replacement of high-cost debt taking advantage of lower interest rates, and recourse to raising funds abroad at fine interest rates were all pursued aggressively. The pay-off: Fatter bottomlines. Notable instances are Tata Motors, Tata Steel and Grasim.

STOCK-SPLITS: Equities that used to be out of bounds for the retail investor have been made more affordable by stock splits. Significant, though, is the nature of companies that resorted to this measure to boost liquidity — Madras Cements, Sundram Fasteners, LG Balakrishnan Brothers and TVS Motor, which are considered to have conservative leanings.

TURNAROUNDS: This fiscal has seen a clutch of companies moving into the black after remaining in the red for a while. The most prominent has been SAIL; its stock, which traded at about Rs 10 for the first five months of 2003, has almost quintupled.

Also noteworthy has been Bharti Tele-Ventures. As an emerging telecom story, regulatory jolts notwithstanding, the stock has risen five-fold.

UTI ship-shape: UTI Mutual Fund — without the baggage of US-64 and assured return schemes that affected the Unit Trust of India as a whole in the earlier bullish phases — has functioned healthily and delivered value to its investors.

UTI Mutual has, however, cashed in on the bullish phase and distributed about Rs 1,000 crore as dividend. In its Master Value Unit Fund, dividend aggregating to 140 per cent has been distributed in three stages in 2003. Unlike several private sector funds, UTI Mutual has also refrained from luring funds from investors using dividends as a bait; instead the focus has been on performance, which is also a welcome shift from the practices that used be followed by its predecessor.

VALUATION: At a Sensex price-earnings multiple (PEM) of 18, the valuation is still lower than other emerging markets such as Taiwan and Thailand.

This is in stark contrast to the Harshad Mehta-engineered bull-run in 1992, when the market had become overheated in terms of valuation and was trading at a PEM of about 70 as well as those in 2000 (PEM: about 60), whose highs are yet to be breached.

The relative attractiveness of valuation and improving growth prospects have ensured that India continues to attract institutional interest.

WIDTH: As the rally gathered momentum, the number of stocks that participated in it has also risen in tandem. During the early part of the rally, about 1,100 stocks were traded on the BSE. By September-October, this number had doubled, as other stocks that had missed out earlier joined the party.

Admittedly, trading also resurfaced in a number of stocks with dubious credentials; but that does not detract from the secular nature of the ongoing bull market.

X-FACTOR: Quite a few contenders here: market talk of Warren Buffett having caught a fancy for oil sector stocks and buying into them; reports that hedge funds had supposedly taken huge positions in the Indian market; the nebulous role of participatory notes; rumours of placement of equity with strategic investors; and talk of large orders from Wal-Mart, which has catalysed more than a fair share of textile stocks.

Such talk may have floated out of the market quickly, but the bulls would have none of it.

YIELD: Falling yields have forced investors to look at equities to boost their investment returns. Returns from the bond market have stabilised and windfall returns are unlikely.

Banks, though, had a wonderful time, as the declining interest rates ratcheted up returns from their treasury operations, and fired up their stock prices in the process.

Oriental Bank, Punjab National Bank, Canara Bank, Vijaya Bank and Indian Overseas Bank, to name a few, sport gains in excess of 100 per cent.

Their stock price performance has given them a make-over that even professional advertising outfits would find difficult to match.

ZING: One word that captures the flavour of the market this year. The broad-based CNX 500 has delivered 90 per cent; the CNX Mid-Cap, which captures the dominant theme of 2003, has risen by 125 per cent.

There is a bigger story out there than is evident from what is indicated by the widely tracked indices such as the Nifty and Sensex, which have notched up gains of about 65 per cent each.

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