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Time for action!

Feb 23, 2002

It was a mixed week on the bourses. After having run up more than 6% over the last one month, profit booking crept in. This week the bourses hardly moved. In this weekly round up, we take a closer look at the big movers during the week and a preview of the budget. First consider the big movers during the week. With the Reserve Bank of India allowing 49% foreign direct investment (FDI) in the banking sector, banking stocks have been in the center stage of buying interest. Not only are the top rung banks moving up, smaller private sector banks are moving up at a faster clip. Investors have to be cautious on this front because not all banks would be able to attract foreign participation. There are banks, which have dubious track record. Besides, the RBI is yet to clarify whether this 49% FDI limit includes foreign institutional investor (FII) limit also. In the long run, yield spreads for the sector would continue to get thinner as competition increases. Only the larger players who have wider revenue streams and bigger asset base would be able to grow.

Amongst old economy stocks, auto companies have been in the limelight for quite some time. With agricultural sector performing well in the current fiscal, demand is expected to gain momentum in the coming months. When we spoke with Bajaj Auto, the management said that demand for motorcycles in rural India has picked up speed (Read interview). TVS, Hero Honda and Ashok Leyland moved up by almost 14% each in the last one week. TVS is trading at its new 52-week high levels, which is at par, in terms of valuation, with Hero Honda. This seems to be on the higher side even as TVS faces falling moped sales and slower growth in scooter segment (where the company had spent huge sum). The company’s regional presence is also a key negative. With the exit of Suzuki, there are challenges galore for this company. However, it needs to be mentioned that prospects for the auto sector, as a whole, are promising. With old economy stocks in focus, activity has been mixed in software stocks.

Given the fact that the markets have run up notably in the last two months, further upward movement would require a fundamental improvement in the economy. The finance ministry would have been flooded with wish lists for the budget from various representative organisations. Though there are some positives like disinvestment and rise in rural demand, government’s fiscal indiscipline continues to remain a cause of concern. Investments, which have been literally lacking over the last four years, have to be encouraged.

While it is widely expected that the budget will have something addressing this, where we are lagging is on the implementation front. Rather than focusing on the revenue side of the budget alone, we need to speed up our act on curtailing expenditure. But this does not mean cutting subsidies throughout. We have to redirect subsidies effectively so that it reaches where it is intended. This in itself could bring a sea change. One hopes that the government and the Finance Minister consider reforms as an ongoing process and not just a one-day affair with an eye on the stock market.

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