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Market crash: Feeling PSU pain

May 17, 2004

Investors, take a back seat. The headline numbers may reflect that the stock markets are down very sharply. But look deeper and you will find that the major reason why the stock market has declined in the recent past was on account PSUs! Just to put things in perspective, stocks like ONGC, SBI, BHEL, HPCL and MTNL have a 26.8% weightage in the benchmark, BSE-30 or Sensex as it is called popularly. We would like to mention that this weightage is based on market capitalisation (i.e. HPCL's market capitalisation upon Sensex's market capitalisation) whereas the actual weightage is calculated on the basis of free-float. Of this, ONGC alone has a 17% weightage in the Sensex!

Just to put the decline in ONGC in relation to the Sensex, the stock has fallen by almost 26% in the last few days. Based on market capitalisation based weightage, the impact on the Sensex is to the tune of 209 points (or 16% of the fall). If we cumulate the total impact on these five PSUs, the contribution the total loss works out to 27%, which is significant. However, if we go by free-float weightage, the impact on the Sensex is likely to be lower.

What is the point that we are driving at?

  1. One, the reasons for the decline in PSUs is because 'sentimental expectations' regarding elections turned out to be false. But the question one should ask whether 'fundamentals' have changed or not? The answer is a resounding No!

    It is not even a week since elections results have been declared. Without giving any time to the new government, it is improper to conclude that reforms will be stalled. At the end of the day, there are far better issues to be tackled apart from disinvestment from a long-term standpoint.

Just consider what Ms. Sonia Gandhi had to say about the Congress Government's priority.

What are the three things that your government will do that will be an improvement over the current government?

Well, first of all, I know there are some reservations among people on our stand on reforms... economic reforms. There should be no worry whatsoever. The policy of continuing with economic reform will carry on. Nobody should have any doubts on that. But our economic reforms are slightly different from the BJP's. In ours, there is a very strong focus on social welfare programmes, rural development programmes, poverty alleviation programmes and administrative and financial strengthening of panchayats, which has not taken place. In the case of this government what they have done, they have chipped and chopped so many of the poverty alleviation programmes that they have become practically ineffective. We greatly admire our entrepreneurs, administrators and business class because they have done a great deal. The business community going ahead, we are all for it. At the same time we have to focus on the poor.
Source: Indian Express.

So, we suggest investors to have a re-look at fundamentals and take investment decisions accordingly. As per Mr. Ajit Dayal, one of the renowned investment managers in the country, "The buying opportunity has begun..."

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