The Capital market is always choppy and wavy, like the high seas. That
is the nature of the beast. There is no moment of rest. Each trough
spreads its share of gloom, negativity and suicides and each crust
bring with it euphoria, splurges and binges. We have seen many across
centuries; Tulip Mania of Amsterdam 1637, South Sea Bubble 1720, Wall
Street Crash 1929 and again in 1987, Harshad Metha driven boom in India
1992, South East Asian melt down in 1997, internet boom and bust around
the world of 2000 and now the mayhem in world financial market.
I
was looking at an article that I had written in 2003, when the
sentiments were down after the tech bust, 9/11 Iraq war, Enron,
Worldcom and Arthur Anderson scams. The BSE Sensex was around 3000.
Paul Krugman’s observation in Fortune in September 1998 that ‘never in
the course of economic events-not even the early years of economic
depression- has so large part of the world economy experienced so
devastating a fall from grace” looked relevant in 1998, 2003 and even
today.
My article was an expression of my optimism that what
goes down will come back. Since then we have gone up and now come down
again. The Sensex in the region of 9,000 – 10,000. At this stage I feel
it is relevant to feel optimistic again. I wanted to pen my thoughts
about it and I realized that I don’t need to write a new article again.
Just a few edits of my old article. And that is what I have done. For
the sake of convenience, continuity and a bit of wry humor, I have
retained the original parts in (bracketed small font) that I have edited out and marked the additions in italics. This is how it goes.
With (war clouds looming large) the world of financial markets having experienced a worldwide melt down,
the world of investment seems to be in a state of limbo. Adding to this
woe has been a spate of poor corporate performance (in developed)
around the world, few high profile bankruptcies and accounting scams
which have literally pulled the rug from under the leg. All in all the
general perception seems to be in hoarding money in cash or near cash
equivalent or park in yellow metal.
Let us take a look at it
from a different perspective. I believe that this is the time for
investors who are looking for value opportunities. A time to pick up
shares at real good value. To get some good returns in medium term you
don’t have to be even adventurous in terms of investing in speculative
and high risk ventures. Just look for few well established and well
performing conventional companies. The chance of disappointment is
really low. What gives me this confidence? The same reason the prices
are down today; the uncertainty around us. It has been always seen that
at times of uncertainty the investor looks for a high risk premium and
it translates to a lower price for stock. This means that the investor
is willing to pay a relatively lower price, compared to times when the
uncertainty is low, to buy a piece of the same company. Today we are
surrounded by innumerable of factors of uncertainty, which leads to
depressed prices.
There is certainly a very high probability
that at least some sources of this uncertainty will get sorted out in
the near future. This means that general level of depression will
certainly pass and this has to convert to better valuations. We have
seen this in all markets at all times. Look at what happened after the
Gulf war in the US market. The markets have produced above-average
gains following U.S. involvement in the World Wars, the Korean War,
Vietnam and the Gulf War.
From the general let me venture in to
specifics. Let us look at what can be one of the winning markets for
the coming year. One of the winners definitely will be the Indian
Market. The factors in favor are just too many.
Indian economy in general has been on a high gear. With a GDP growth of around (5%) 6.5% in 2009 compared to an average of about (2%) 3%
for the world as a whole India has been one of the fastest growing
economies in the recent past. Even the projections for the coming
couple of years seem to be in the same direction.
Corporate Sector in India has been performing outstandingly till last year. The current year has witnessed the aftershocks of the worldwide melt down. (When
the general results from the corporate sector around the world has been
filled with more bad news than good, Indian corporates have been
showing a different color.) Indian companies in the earlier era
of protected markets had significant inefficiencies inherent in them.
Now that they have been exposed to global competition, they have
tightened their belts and released significant gains. (During
half year ended in September 2002 the net profit of the Indian
corporate increased by more than 50%. In the third quarter ended in
December 2002, the results of the major 679 companies which released
their results shows that the sales has increased by 70% and net profit
has increased by 15%.) CMIE expects aggregate profit after
tax (PAT) of listed Indian corporates to rise by 77.3 per cent in
2009-10.The detailed analysis by CMIE is given at the bottom of this
article
The foreign exchange reserves have been growing at
a quicker pace. For the first time after 1978 the year 2002 showed a
surplus in the current account. With more than $ 290 (72) billion in
foreign exchange in September 2008 Indian government has now allowed
Indian citizens to buy and own foreign assets out of their rupee
earnings in India.
(The external
debt situation has also reduced significantly to 21% from a peak of 39%
in March 1992. This has resulted in debt service ratio improving from
27% in 1992 to 17% in 2002). As per Ministry of Finance
Press Release India’s total external debt stock at end September 2008
stood at US $ 222.61 billion, which is marginally lower than the level
of US $ 223.81 billion at end June 2008. The ratio of foreign exchange
reserves to total external debt as at end September 2008 stood at a
comfortable level of 128.6 per cent.
(Realizing the reversal in the Rs /US$ exchange rate Indian companies are today taking un-hedged US$ denominated loans.)The
recent depreciation of the Rs on account some capital flight has given
some jitters to such companies. In fact these companies have been
lobbying to get teh accounting standards modified so that they will not
have to show the marked-to-market losses in their annual report.:-)
Even
infrastructure sector has improved in an encouraging fashion. The
telecom cost which was one of the most expensive in the world has seen
price reduction of more than 50% since the complete decontrol of this
segment. Today in spite of recession it is one of the fastest
growing segments in India and one of the most attractive by world
standards. Roads and Ports are getting significant investment.
With
so much to go for India is an excellent bet for investment in medium
term. Although I have been in the Industry for a long time I am
normally very conservative and very guarded. But I have very little
reservation in being bullish on India in the near future.
Corporate India’s PAT to grow by 77.3% in 2009-10 - CMIE clarifies
CMIE
expects aggregate profit after tax (PAT) of listed Indian corporates to
rise by 77.3 per cent in 2009-10. This robust profit growth projection
is based on the expectation of the petroleum products sector returning
into profits from the March 2009 quarter. The losses incurred by the
petroleum products sector had eaten away more than a third of the
aggregate profits made by the rest of the Corporate India during
April-December 2008. Benefiting from the fall in the crude oil prices,
we expect the petroleum products sector to make net profits of
Rs.11,225 crore in 2009-10 as against the net losses of Rs.56,533 crore
estimated for 2008-09.
The aforementioned profit figures are
exclusive of prior period and extra-ordinary income. CMIE always uses
PAT figures exclusive of P&E as it enables meaningful inter-period
comparison.
We have excluded Rs.60,967 crore received by the
petroleum products companies during April- December 2008 from the
government in the form of oil bonds. The oil bonds are not with respect
to the sales made during the quarter in which they were received. It is
a reimbursement of the loss suffered by the petroleum products
companies.
We expect the petroleum products sector to show a
major turnaround at the PAT (net of P&E) level in 2009-10. This
will have a major bearing on the overall profit performance of
Corporate India as the petroleum products sector contributes 25-30 per
cent to the aggregate net sales.
Excluding the petroleum
products sector, the rest of the Indian corporates (listed on Indian
bourses) are expected to report a 22.7 per cent rise in aggregate PAT
in 2009-10. The healthy order-book positions of the construction
companies and the machinery companies are expected to help them report
robust sales growth. Sharp rise in sales, softening of interest rates
and fall in commodity prices, particularly metals are expected to help
the construction and machinery sectors to report 40- 50 rise in PAT in
2009-10. A gamut of other sectors such as commercial vehicles, wires
& cables, tyres & tubes, plastic products and polymers are also
expected to benefit from the fall in input (commodity) prices and low
interest rates.
Non-financial services such as hotels,
health services and LNG storage & distribution are also expected to
report over 20 per cent growth in PAT in 2009-10. The hotels sector
witnessed a fall in income and PAT in the December 2008 quarter because
of the fall in occupancy rate following the terror attack and slowdown
in the global market.
We expect the sector to show an
improvement in income and PAT growth in 2009-10 backed by improvement
in occupancy and hike in room rates. Similarly, the health service
sector is also expected to report a healthy growth in profits backed by
capacity
additions and higher average revenue per customer. Doubling
of capacity by Petronet LNG and the additional transmission volumes of
gas from the KG basin of Reliance are expected to help the LNG storage
& distribution sector report a healthy income growth in 2009-10.
This coupled with the lower raw material prices is expected to help the
sector to report a 47.4 per cent rise in PAT in 2009-10.
We
expect the profit performance of the banking segment in 2009-10 also to
be healthy. The sector is expected to report a 28.3 per cent rise in
PAT owing to continuation of healthy over 20 per cent growth in credit,
lower operating expenses and lower provisioning levels compared to
2008-09.
Finally, it is not unusual for Corporate India to
report very high or very low profit growth. In 2002-03 and 2003-04, PAT
had grown by 70.2 and 76.0 per cent, respectively. In 1994-95, PAT had
more than doubled (104.2 per cent) in a single year.