Are Indian firms giving a big sell signal?

Sep 15, 2010

In this issue:
» Companies behavior amounts to a big sell signal
» Oil prices to remain steady says OPEC
» No double-dip recession, says Warren Buffett
» More worries for Indian IT
» ...and more!!

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Everyone is interested in knowing whether the stock markets have peaked. Various methods are used to find an answer. Some study the economy and broad trends. Some look at patterns. Clues like relative performance of small, mid and large caps. Maybe, even sudden spurts in the construction of tall buildings. There is another approach.

It is based on a simple piece of logic. Investors are basically buyers of part ownership, called shares, of businesses. On the other side of the table, promoters are sellers of these shares. Sellers generally have more knowledge about their goods and its true worth. They would also like to fetch a high price for their goods. Hence, a rush of IPO indicates that promoters like the prices. Interestingly, there is a flurry of IPOs of late. A rush not seen since April this year.

Then there are stock splits and bonus issues. They are mainly done when the share price rises to levels which seem unaffordable for small investors. The number of shares outstanding increase after splits and bonuses and the share price goes down proportionately. In the last two weeks, 13 listed entities have opted for them. Since August, the number is 33.

Of course, the best way of judging valuations is to study companies on a case to case basis. But short of that, sellers' behavior is a great indicator. Right now, the indications are that there are very few bargains left for Indian investors. Hence, it would be advisable to exercise extreme caution.

 Chart of the day

Source: PTI

India is one of the few bright spots for the world steel industry. After all, demand for long steel products used in construction and flat steel products used in automobiles remained robust here even when there was mayhem in the developed world. So it is surprising that India exports iron and steel in the order of billions of rupees. As the chart of the day shows, India's iron and steel exports have grown steadily over the years. Export demand was affected in FY10 by the economic slowdown. Iron ore is a large part of these exports. As India and its steel industry progresses, it must aim at exporting value added steel and not merely raw ore.

What was earlier "Oh, I'm not worried" has now turned to "Oh no! It's happening!"

We are referring to the thoughts that are crossing the minds of the CEOs of Indian IT companies. Most of them had rubbished the US government's ban on offshoring, saying it was just a political gimmick. Now they are accepting the bitter truth.

As per the chief of Infosys, India's second largest IT services firm, "What we see from customers is that they are committing short term; they also reserve the right to cancel, so clearly, everybody is playing the short-term game at this point in time."

We believe if this is true, and if the trend continues, it can deal a big blow to the Indian IT industry. The matters could be worse as the industry is still recovering from the deep slowdown of 2008 and 2009. Most of these companies have reported improved hiring and profit growth over the past 1-2 quarters. So another round of weakness can damage their confidence and financial performance.

Now, this is going to be quite interesting. People like Nouriel Roubini and Bill Bonner have thrown down the gauntlet. They have made it amply clear that they see the US economy going into a funk sometime in the very near future. In other words, a double dip seems too likely to ignore. Well, the gauntlet has been picked up by none other than Warren Buffett, arguably the shrewdest investor around. "We will not have a double-dip recession at all. I see our businesses coming back almost across the board," Buffett thundered at a recent public meeting. "I've seen sentiment turn sour in the last three months or so, generally in the media. I don't see that in our businesses. I see we're employing more people than a month ago, two months ago," the Oracle of Omaha added further.

Normally, we hate to take a side opposite to that of Mr. Buffett. But even he will admit that macroeconomics is not exactly his area of strength. Hence, it is quite likely he loses out here to guys like Roubini and Bonner who are proven big picture guys.

In fact, Buffett's speech has left us a little bemused. It is very well known that Mr. Buffett hates companies with very high leverage. But how come this logic is not extended to the broader economy. The debt in the US has indeed gone up quite a bit in recent times. Thus, this should make Buffett less confident about the US economy and not more. Surely, something certainly seems to be amiss here. Mr. Buffett's optimism seems to be getting the better of his rationality.

Oil prices have remained quite stable this year. This has definitely come as a relief to oil importers. And as per the cartel of oil producers, OPEC, the prices should not rise for now at least. It expects oil prices to trade between US$ 75-85 till the middle of 2011. This is on the back of difficult economic conditions prevailing in countries across the world, which it expects to improve only by mid 2011. As a result, the OPEC is hesitant to take any major policy action that would impact prices in a big way. It feels that the current level of inventories and demand would justify crude oil prices at sub US$ 100 levels. Going by history though, the commodity has a way of surprising most experts.

Speaking of commodities, gold prices in India are on a rampage. Today, India gold futures have struck a record high of Rs 19,250 per 10 grams. The yellow metal is attracting more and more investors as they seek a store of value against rapid current and potential inflation. With the onset of the festive season, the trend is likely to continue for some time atleast.

The demise of Lehman brought to the fore the excesses of Wall Street. It questioned the idea of capitalism as the biggest financial crisis since the Great Depression unfolded. For many there were some painful lessons to be learnt from the Lehman episode. After all there was a stark difference in the way the Lehman was run in its early years as compared to its later years, under Dick Fuld. First of all, Lehman committed the mistake of focusing too much on a short term agenda that proved to be its undoing rather than focus on long term investments. Then, in investment banking building relationships is very important. Not just with clients but also with governments. Something which Lehman failed to do. What the crisis also brought to the fore was the reliance on maths and the perception that financial models were infallible. The intitial philosophy of Lehman was to 'bet on the man'. This gave way to 'bet on the models.' Lehman in its later years also sold 'fancy instruments' and imbibed a culture of bagging bonuses. All of which triggered excess greed on Wall Street and ultimately led to its downfall. That said, two years after Lehman collapsed, it is hard to say whether Wall Street has drastically mended its ways. The indications are that it has not.

The uptrend in the markets over past few days, continued strong today. After opening in the green, markets consistently ramped up gains. The BSE-Sensex was trading 125 points higher at the time of writing. Stocks from the oil & gas and IT space were trading firm. Realty and banking stocks were however trading flat. Sentiments were mixed in the rest of Asia, with Japan up 2.3%, China was however 1.3% in the red.

 Today's investing mantra
"By confining himself to a relatively few, easy-to-understand cases, a reasonably intelligent, informed and diligent person can judge investment risks with a useful degree of accuracy." - Benjamin Graham

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6 Responses to "Are Indian firms giving a big sell signal?"

Major(Rtd) Ranganath

Sep 25, 2010

whether it is micro/macro-our leaning towards US, is-- if they get Coryza(a common cold)--we get Lungs cancer here.It is high time,we should learn to stand on our feet-erect, without,moving like an Indian Army soldier. Even if we lean towards US, it should be like Tower of Pisa,never falling.


Adi Daruwalla

Sep 15, 2010

Well one should go with Nouriel Roubini. I think his judgement has been quite accurate in the past. He is the guru of economics. Warren Buffet is an investor and when a smart investor sees a double dip coming he does not want to tell the world about it. There is a double dip happening " W " right now. Also Indian IT companies are building offices to employ foreigners in recession prone America and Europe. No doubt Warren Buffet is of the opinion that employment is moving upwards along with US companies also wanting to employ. But a word of caution is timely for the Indian IT giants. First use the resources and places in India, then go to foreign lands. But diplomacy and smart money making takes over, so we have our desis licking foriegn shores and foreign ministers to increase their stakes of the pie. Well for one No 3 IT player is fast losing its slot to another IT player. Maybe its bad politics of its head honchos sitting on thier honches or the ho jayega attitude that has seeped in. Or should Vivek Paul be called back to the No 3 IT player to make them more stable. Any strategies to revive the slot????



Sep 15, 2010

Regarding Warren Buffett's views:
I tend to believe that Buffett definitely has more
insight and experience about US economy than any
of us and also he is adviser to President of US.
Now, there was a news item that Obama has planned
to invest $50bn in transportation sector which
would be arranged by taxing gas and other such
lucrative sectors. This investment, if made as
being planned, would create tremendous
opportunities for US companies and people. So
Buffett might have better insight as he has taken
gauntlet. If his view prevails in coming days,
then he will be clear champion of contrarion view
theory and might also be declared a great
optimist, OTHERWISE his fall will accelerate as
his recent investments have gone awry and already
incurring losses of around $7-8bn.


Tukaram Shetty

Sep 15, 2010

About Buffet's view of not having double dip recession in USA has two untold reason. First after all he is loving citizen of the US of America and Second important one is his talks are viewed seriously by all investing people across the world and particularly in USA. If he say any negative view that enough for the market to start tanking. So he have to show brave front views.


sanjay kr. singh

Sep 15, 2010

I agree with the views of equity master. However, I request to guide what to do with those stocks bought recently on the basis of recommendations of equity master, which are far below their instrinsic value, this time. Shuld I sell them and wait for the market to come down or Hold them as I am a long term investor.



Sep 15, 2010

Thank goodness for once EM does not agree with Warren Buffet! Otherwise, till date EM had been blindly backing any and every view expressed by Warren Buffet. Many readers of EM were weary and apprehensive of this!

Market prediction is a hazardous game and nobody should be venturing into it, if one can avoid it. I was quite surprized when EM predicted sensex reaching 21000 in June-10. That was quite needless. We are now in Sep and the sensex haven't reached that magic figure. I hope and wish EM sticks to their core competency of equity research and analysis and refrain from sensex predictions.

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