The Hindu Business Line : Bullish on equity

The Indian stock markets have been booming over the last year. From last to this Diwali the Bombay Stock Exchange (BSE) Sensex was up 2000 points from 6000 to 8000, a gain of 33 per cent. The high during the year was 8821, making the gain from 6000-levels a whopping 47 per cent. The National Stock Exchange (NSE) Nifty gained handsomely as well — up 28 per cent from 1870 to 2386, a gain of 516 points. The highest it reached during the year was 2669 or a gain of 43 per cent.

This was a handsome and profitable gain for anybody in the markets, but what were the reasons? Clearly this was a liquidity driven rally, boosted by FII flows. In just nine months of the current year, they invested over Rs 37,000 crore, and when they pulled out a mere Rs 3,500 crore, there was panic. This panic was clearly unwarranted, as a correction had to come in any case, what with a staggering 1600-point rise on the Sensex in just 16 weeks.

The quality of investors has also been changing as far as FII investment is concerned. You have investors from pension funds and from countries that have never invested in India. Japan, Korea, Taiwan and Germany have all come here to invest. The number of registered investors has increased by one third in ten months from 600 to over 800. This ensures a steady inflow as every new investor invests a base amount after registration.

Liquidity-driven rally was therefore the key to the rise last year, coupled with a booming economy registering a GDP growth of over 7 per cent. This growth was led by demand and consumption, and aided by stable interest rates and moderate inflation. The only negative was the huge rise in crude oil prices that hit everyone. The earnings of the Sensex basket have been rising at about 16-18 per cent and are likely to continue to grow in the same region. The GDP growth is not expected to reduce either.

In such a scenario where is the Sensex likely to trade? I believe the magical figure of 10000 is likely in Samvat year 2062. The other drivers are likely to be stable interest rates with a roughly 50 basis points rise over the next 12 months and positive FII flows. The sharp depreciation in the value of the rupee is also beneficial for inflows. The only negative in the form of crude oil prices continues, with oil around $57-58, lower than the $70 mark but still very expensive.

Future prospects

What should investors expect from the markets over the next 12 months? The Sensex is likely to touch 10000 and against a 33 per cent appreciation over the last year, the expectation this time should be between 20 and 25 per cent, which translates to 9600 and 10000 on the Sensex.

With these positives and India, with its 1.25 billion population being a large consumption driven economy, we should do well on the GDP and the stock market front. So where should one invest?

The biggest driver for growth is infrastructure development and consumption. All companies that meet these demands will do well. Exports would be an added bonus. The mantra for the next 12 months would be to look for companies with consumption driven growth having expansion plans. After a gap of 10 years, a major spending on capacity expansion is happening over the last year.

A second-year student of Indian Institute of Management - Lucknow, Varun K, recently sent me his analysis of GE Shipping that was convincing enough to include in this article. "GE Shipping's slow growth this quarter was due to the dry docking and refurbishment of its rig `Kedarnath' and repairs to a damaged floater `Badrinath'. As a result, the offshore division reported lower revenues to the extent of Rs 50 crore. This situation would change from Q3. Freight rates should be much higher due to increase in steel production; destruction caused to the oil refineries in the Gulf of Mexico by the hurricanes and anticipated winter demand. Moreover, the proposed demerger will unlock shareholder wealth because globally P/E ratios of shipping companies are 6-10 whereas offshore services in India are 25-40. Even if the P/E of the offshore division reaches 15, the value of the combined entity should still be above Rs 300 per share."

The logic is faultless and the fact that the share is still available at around Rs 210 is baffling. I believe GE Shipping should quote at Rs 300 within the next six months if not earlier. The restructuring and subsequent listing of the two divisions should be on by March-April 2006.

Best buys

The growth of India Inc is dependant on "Retail India" and companies in this sector would be big gainers. Stocks such as Bata India and Shoppers Stop would be beneficiaries. Corporate India's performance has been robust and profits have almost doubled over the last three to four years. With such a robust performance and access to international markets and funds, our companies have become self-reliant and strong. Even if interest rates do move up by about 50 basis points it should not affect them much. In such a scenario, with a robust economy and a healthy GDP growth the banking sector would do well. Companies such as SBI, Union Bank, BOB and BOI would be the top picks in banking.

Sugar manufacturing companies located in the sugar State of Uttar Pradesh have a distinct advantage over the rest of the country with an incentive announced for fresh expansion. This fiscal benefit spread over 5-10 years, coupled with sugar stocks being virtually at their lowest levels in the last few years, would help these companies do very well. Balrampur Chini, Bajaj Hindustan and Mawana Sugar are bound to do well.

Power equipment manufacturing and capital goods manufacturers would do exceedingly well in the coming year. Companies like ABB, BHEL and Siemens would be major beneficiaries.

The software sector can never be left out of any investment list. The unexpected depreciation of the rupee has been a big boost for the sector. Infosys, TCS and Wipro become the best picks, but there is lot of value in the mid-cap IT sector too.

One sector where I would like to take a contrarian's view is the refining and marketing of petroleum products. Reliance has committed a capex of Rs 25,000 crore to double its refining capacity to 60 million TPA, which clearly reflects its bullishness on the business. Its competitors, the PSU refiners, cannot remain far behind and the current half-year losses are clearly an aberration as a result of the under-recoveries on account of petrol and diesel, and subsidies on kerosene and LPG. With gas becoming another important part of the hydrocarbons field, this sector needs to be watched. My picks in this field are Gujarat Gas, GAIL, HPCL, BPCL, IOC and the largest private player, Reliance Industries.

ITC, where the foods business and E-choupal appear interesting, deserves investor attention, as also aluminium producers Nalco and Hindalco and the zinc manufacturer Hindustan Zinc. Continuing with metals, Tata Steel, a unique integrated player with a great future ahead, cannot be ignored. I would believe in a company that as recently as FY02 earned just about Rs 200 crore, earning in the current year, over Rs 1,000 crore per quarter. The company is increasing its capacity from 4 million tonnes to over 25 million tonnes in the next six years.

In conclusion, a great year is ahead for investors, but it is important to be cautious and invest only in quality stocks.

(The writer can be contacted at kejriwalarun@rediffmail.com)

Picture by A. Roy Chowdhury

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