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Stockmarkets: The India Inc. push

May 17, 2004

The Indian bourses have had a great run during 2003 having shot onto the investment radars of investors - both retail and institutional, domestic and international. All along 2003, the indices kept scaling newer highs as investors continued to increase exposure to equities. Though there were some hiccups in the bullrun during the early part of 2003 in the form of SARS, Gulf war and India-Pak standoff, investors soon put those behind. Improved operational efficiencies of corporates couple with lower interest rates helped India Inc. to dole out robust performance quarter-after-quarter. This not only attracted retail participants into the markets, but the Foreign Institutional Investors (FIIs) community also saw huge opportunities in the then undervalued Indian stock markets, which traded at anything around 10x-11x its earnings. This encouraged them to pour money into Indian equities and they continue to do so (notwithstanding the recent FII outflows) - a sign that Indian markets continue to remain relatively attractive over other emerging markets. To put things in perspective, after investing over US$ 6.0 bn in 2003, the flow has been equally strong in 2004 so far with total investments (equity plus debt) totaling over US$ 4.0 bn in the first four months of the current calendar year, with a major chunk of this being allocated to equities.

Note: Consists of the 20 companies that have declared their March quarter results as yet

If we look at the last five quarters performance of the BSE-30 companies, the strong performance of corporate India gets much more clearer. As can be seen in the chart above, despite the slower growth rate in sales, the YoY net profit growth have been largely on a consistent rise over the last five quarters. A large credit of this can be attributed to the significant improvement in operating efficiencies of these companies that helped them register such robust performance. A sharp reduction in interest expenses over this period has also aided the profitability improvement of these companies.

Just before the March 2004 quarter results were to be declared, there were apprehensions in the market about the continuance of the strong growth rates that were being witnessed since the last few quarters. However, the quarterly numbers declared as yet by 20 of the 30 companies, forming part of the Sensex, have beaten the performance of the previous four quarters of calendar 2003, with sales growing by 17% and operating and net profit registering a YoY growth of 36% and 43% respectively. It must be noted that in case of three Sensex companies viz. Satyam, Grasim and Hindalco, the 4QFY03 numbers had been very subdued owing to extra-ordinary items and as such, the same have been adjusted to arrive at the 43% net profit growth figure, without which, the growth would stand at over 60%! Interest costs have also continued its downward trend (down 8%).

However, despite the eye-catching performance of India Inc., Indian stock markets have not gone anywhere in 2004 as yet. In fact, they have lost about 8% in 2004 so far. It wouldn't be incorrect to put the blame for this on political scenario in the country, which has kept investors on the sidelines, discouraging them to make any investments until the election uncertainty was over. The IPO market also played its part, in early 2004, at keeping the secondary markets out of favour considering the number of quality primary issues (TV Today, Biocon, PTC, etc). The secondary offerings (ONGC, GAIL, etc.) that, though did not create liquidity problems, partially aided the shift of investor focus towards the primary market.

At the current juncture, the P/E valuation of the Indian bourses (benchmark index) is at about 14x (12x FY05 expected earnings estimates) trailing 12-month earnings, which despite not being one of the most lucrative, continues to remain fairly attractive. It must be noted that the Indian stock markets have usually commanded a P/E valuation of 16x-17x, a fact justified by the CAGR earnings growth of approximately 18% of benchmark index companies over the last 8 years. Of course, while the story of triple digit returns is over, considering the developments in the form of reforms that have taken place in our economy, equities would continue to deliver decent returns. The only caveat here for an investor is the detection of an investment candidate with good management and business model that would reward the investor.

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