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Market: A fundamental check! - Views on News from Equitymaster
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  • May 22, 2006

    Market: A fundamental check!

    The week gone by has been a volatile one for the Indian stock market, which saw the Sensex shed nearly 11%. Despite the jitters being felt in the markets, we believe that the 'India growth story' remains strong and here are the reasons why.

    Strong GDP growth: In FY06, the GDP growth rate stood at 8.1% against 7.5% in the previous year led by a strong performance of the manufacturing and services sectors. As per the Economic Survey 2005-06, growth of GDP in excess of 8% has been achieved by the economy in only five years of recorded history and two out of these five are in the last three years. This highlights the underlying strength of the economy in recent times. The Tenth Five Year Plan (2002-03 to 2006-07) has envisaged an 8% GDP growth rate. While there have been hiccups such as erratic rainfall and poor agricultural production, the GDP growth trend nevertheless seems on the right track.

    Reflected in corporate earnings: The recently concluded year (FY06) have seen corporates post good results and the outlook looks healthy going forward. To cite a few examples:

    • In the software sector, greater acceptance of the global delivery model, strong client additions and large order wins led to the increase in business volumes in FY06. Going forward, the business outlook by the top tier companies in this sector continues to remain highly encouraging.

    • In the pharma sector, robust performance in the domestic and the semi-regulated markets contributed to the overall growth of pharma companies, despite pricing pressure in generics. The generics potential in the coming years is expected to drive the topline growth of both generic and contract manufacturing companies.

    • Government's increased thrust on infrastructure developments in the Union Budget, 2006-07 is expected to boost performance of the capital goods sector. The robustness in capital goods imports into the country in the last year and a half vindicates our argument.

    • The auto sector, in general, is also expected to benefit from higher GDP growth rate and the consequent increase in household income. Besides, the recent global meltdown of commodity prices including metals is likely to have a positive impact on the margins of this sector. Though the rise in interest rates and oil prices are key concerns, if one take a three to five year perspective, we continue to believe that auto demand can grow at a 8% CAGR (in volumes).

    • FMCG companies benefited from the normal progress of monsoon in FY06 and its positive effect on revenues. Besides this, abolition of excise duty on branded foods and reduction in excise duty from 16% to 8% on select fast food items in the Union Budget, 2006-07 is expected to benefit the food and beverages sector going forward.

    While these are only examples of few of the sectors, the fact remains that the fundamentals and business outlook of most of the corporates look healthy. Yes, there may be a decline in the rate of growth in corporate earnings (from as high as 25% in the last two years to around 15% to 18% levels). But it is still a healthy growth rate by any yardstick. The sharp fall in the indices should be looked upon as an opportunity by investors to buy into stocks with strong fundamentals in the long-term. It must be noted that prior to the fall, while the growth prospects were never in doubt, it was the stretched valuations that were a matter of concern.

    To sum up...
    The broad based sell-off during this week has largely been triggered by the developments in the global markets, which were impacted by inflationary concerns and the fears of possible further rate hikes by the US Fed. It is a well-known fact that Foreign Institutional Investors (FIIs) were major contributors to the meteoric rise in the BSE-Sensex in the past one year to capitalise on the 'India' story. Though they have been net sellers this past week, we still maintain that India's growth story remains intact and that this falling market provides a vehicle for investors to invest in select stocks (depending upon his or her risk profile) in a phased manner.



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