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Waiting for the green signal

Jun 2, 2003

The last few weeks have seen a consistent rise in indices. While banking sector has been hogging the limelight, select index heavyweights and cement majors have also moved up. As we have maintained before, investors should not miss out on the opportunity this time. The fourth quarter performance of India Inc by and large has been impressive. Barring technology stocks that have provided a cautious outlook, old economy majors from commodity, auto and banking sector have shown marked improvement in both operating parameters like margins and at the net level. Bottomline growth of commodity stocks from steel sector has been aided not only on account of favorable prices in the international markets, but also due to a sharp decline in interest outgo. To put things in perspective, the combined interest expense for both SAIL and Tisco is lower by 15% to Rs 16.3 bn for FY03. The free cash generated combined with a low interest rate scenario has enabled commodity majors to lower debt cost noticeably in the last three years. This trend is not just restricted to steel alone but also for auto, energy and paint majors.

Though the economy has been growing at 5%-6% in the last five years, the ground realities are that demand has remained sluggish during this aforesaid period. Infrastructure investments have taken shape only in 2000 and after. Housing has been the only sector that has been growing at a faster clip thanks to the fall in interest rates and continuation in tax exemption.

The point we are trying to make is that this period of downturn has enabled India Inc. (or atleast the top 100 companies) to become more productive. If one were to consider the capacity utilisation in cement, steel and energy sectors, it is improved remarkably in the last three years. When the cycle turns, these companies will see a spurt in increase in bottomline as working capital required also has come down. Telco, for instance, currently operates with a negative net working capital to sales ratio (this means it has a better bargaining power with its suppliers and buyers). The company has indicated that only 20% of sales in FY03 were financed (it was the other way around just five years back).

It has been often said that the BSE Sensex is trading at 11.7x trailing twelve months earnings, which is at its historically low levels. True, but what will trigger a correction? Fundamentally speaking, from a long-term perspective, everything seems to be in place. This includes drastic improvement in efficiency, low interest rate, healthy forex reserves, manageable inflation and last but not the least, a growing economy. But sentimentally, investors seem to exercise caution at the current juncture. But factors like good IPO line up (apart from Maruti, there is TCS and NTPC) and some acceleration in the disinvestment in recent weeks could change the equation. In the month of May 2003 itself, the Sensex has gained 7.5%. Is this the sign of things to come? As a retail investor, instead of waiting for the markets to give a green signal, the time is ripe for increasing allocation of investible surplus towards equities.

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