Are you riding this stock bubble? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Are you riding this stock bubble? 

A  A  A
In this issue:
» Why Goa has the cheapest petrol in India?
» After petrol price hike, get ready for a food shock...
» Are stocks in for a 1987-style crash?
» Big realtors slash land banks by half!
» ...and more!

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2011 was a year that most equity investors in India would want to erase from their memory. The BSE-Sensex had ended the year down by almost 25% from a year ago. Though the Indian share markets recovered somewhat in the new year, the benchmark index is still down about 10% on a year-on-year basis. But there is this particular segment of stocks that has been outperforming the broad market by a massive margin. In fact, if you consider the change in their share price over the last one year, most of these stocks have delivered hefty returns.

Can you guess which stocks we are referring to? The answer is stocks of multinational companies (MNCs). But why have these stocks gained so much? Do they have such strong fundamentals that they have been unaffected by all the issues and concerns weighing over the Indian economy? The answer is no.

If you may recall, the minimum public shareholding rule was announced back in 2010. As per this guideline, all listed public sector companies are expected to maintain a minimum public shareholding of 10%. On the other hand, for listed private sector entities the threshold is set higher at 25%. To put it in other words, private sector promoter are required to bring their shareholding down to below 75% of the total equity. The deadline for complying by these guidelines is June 2013.

But how does this relate to investors piling up MNC stocks? Let us explain. Many of the MNC stocks listed on the Indian share markets do not have the minimum shareholding requirement as per the mandate. The promoters of these companies have two options to deal with the situation. Either they can dilute their shareholding and raise the public shareholding. Or the promoters can raise their stake to over 90% and delist from the stock exchanges. In the case of MNCs, the likelihood of the second possibility is significant. They often prefer to delist than to dilute their stakes. Some argue that even paying a significant premium would not be difficult for MNCs given the financial muscle of their parent companies.

So the entire run up of MNC stocks has been in the anticipation of delisting gains. Agreed that most of the MNC stocks have good fundamentals and strong balance sheets. But do these qualities call for so much of a premium over their counterparts? We do not think so. As per our dictionary, this is nothing but mere speculation. Would you like to bet your hard-earned money on the shaky premise that a company may delist from the bourses? What if the company chooses not to? Then prepare yourself for a massive loss as the stocks crash.

Do you think it is wise to invest in stocks in the hope of delisting gains? Share your comments with us or post your views on our Facebook page / Google+ page.

01:35  Chart of the day
The recent steep hike in petrol prices has drawn a lot of ire from Indian consumers. Not just that, but several political parties have also expressed their rage over the sudden price hike. We thought it would be worthwhile to see how much petrol would now cost in different parts of the country. As per data from Firstpost, per litre cost of petrol is highest in Hyderabad and Bangalore. However, Panjim has the lowest petrol price in the country. Why the difference? This is because petrol prices include a huge quantum of central and state government taxes. The Chief Minister of Goa, Manohar Parrikar, had effected 11% reduction in VAT (value added tax) on petrol from April 2012. This gave almost Rs 11 per litre relief to consumers. It remains to be seen if other states also follow Goa's model on petrol prices.

Data source: Firstpost

It has now become more expensive to drive your car with petrol prices sharply jumping by Rs 7.5 per litre. Now, even cooking food in your kitchen is set to become more expensive. Soon consumers may face higher prices for two daily essentials - i.e. cooking oil and pulses. So far, India has not been feeling the pinch in edible oils on account of a global softening in oil prices. However, the prolonged weakness of the rupee could prove to be a dampener. It may be a matter of time before importers hold off increasing imports which could cause prices to tighten. A number of importers would prefer the rupee value against the dollar to settle before committing to purchase more goods. The total cost of cooking oil imports is expected to rise to about Rs 500 bn in FY13, from Rs 400 bn last year due to rupee depreciation. Those higher costs are likely to be passed on to consumers. A similar story is playing out for pulses as well. India imports around 3 million tons of the protein staple annually. It seems like the only economic indicator in India that is guaranteed to go up is inflation.

What do you think is the biggest one day decline in the history of US stock market? If you answered in the range of 10%-12%, let us tell you that it's not even close. Apparently, the biggest one day fall happened in October 1987 when US benchmark index tanked as much as 22.6% in one single day! Little wonder, the event has gone down in financial history as the Black Monday.

Can another Black Monday happen? Quite certainly we believe. In fact, it could only be few months away as per what Dr Marc Faber observed a few days back. Since then though, Mr Faber seems to have mellowed down a bit. He now believes that the possibility of a 1987-style crash has diminished as markets across the world are already correcting.

We believe that a crash or not, a long term value investor should hardly worry. His central philosophy is to buy stocks when they are available well below their intrinsic value. Thus, it does not matter if the price comes down to those levels within a day or over a period of time. His stock-in-trade is patience and he should count more on it than the possibility of a crash.

Several things have lost their charm ever since the ugly financial crisis reared its head in 2008. One of them is investor fascination with land banks. In the run up to real estate bubble of the recent past, every company, whether in the realty space or not, fetched premium valuation for its 'land bank'. Whether or not its land bank would find any takers was ignored by investors. Hence, it was natural for developers to ensure that their balance sheets were land bank heavy to elicit investor interest. That heavily leveraged books and low execution rates could pose threats did not occur to them during those heady days. However, with the myth of land bank valuations having shattered, realty players are losing no time to shed them from their books. Some have resorted to offloading surplus land to repay debt. Others have stopped buying more land and instead focused on construction on the existing plots. Better inventory turnover ratios and low leverage could certainly do a lot of good to this beleaguered sector in the longer term.

For a while now, the Cameron government has been trying to follow a 'short term pain, but long term gain' type of approach towards improving the health of the British economy. Until yesterday, this government was under the impression that the turmoil in the Euro zone was the key reason behind the slowing British economy. However, this claim seems to have lost some credibility yesterday. The reported downturn in the British economy during the first quarter was worse than what had been estimated. And at the same time, the euro zone managed to escape the recession altogether (thanks mainly to Germany).

All said and done, the pressure on the government is expected to only increase given that the opposition parties and economists have been demanding a scale back of the austerity measures for a while now. And this too especially when the data above has been contrary to what was being believed by the government! Will the government give in to the pressure? Only time will tell.

In the meanwhile, the Indian stock markets have been trading in the negative territory for most part of today's trade. At the time of writing, the BSE Sensex was down by 35 points (0.2%). Sectoral indices were trading mixed with metal stocks and oil and gas stocks being the top gainers and losers respectively. Asian stock markets too were trading mixed while Europe opened on a positive note.

04:45  Today's investing mantra
"The ideal business is one that generates very high returns on capital and can invest that capital back into the business at equally high rates. Imagine a $100 million business that earns 20% in one year, reinvests the $20 million profit and in the next year earns 20% of $120 million and so forth." - Warren Buffett

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    Equitymaster requests your view! Post a comment on "Are you riding this stock bubble?". Click here!

    4 Responses to "Are you riding this stock bubble?"


    Jun 22, 2013

    nifty reliance infy



    May 26, 2012

    i dont think investing by thinking that the companies will delist is a good idea.


    sunilkumar tejwani

    May 25, 2012

    who is Goldman Sachs to predict about GDP growth of Indian economy? Goldman Sachs is a product of a corrupt government backed criminal financial entity (backed by the government of U.S. of A) therefore I do not take it's view on the Indian GDP growth at face value. In fact, this company should be forced to shut shop in India because of it's dubious role in the Indian Capital markets.


    sunilkumar tejwani

    May 25, 2012

    the greedy government of Maharashtra will never reduce tax on petroleum products for the obvious reasons. The politicians want to splurge at the expense of public and the bureaucrats want to enjoy life in the comforts despite precarious situation of state finances.

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