X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Rough weather ahead... - Views on News from Equitymaster
 
 
  • PRINT
  • E-MAIL
  • FEEDBACK
  • A  A  A
  • Jun 18, 1997

    Rough weather ahead...

    Now that the election dates are out, most people are busy trying to figure out which party will win the elections and then extrapolating that prediction into where the election results will take the BSE Index over the next few months. While not trying to dilute the importance of politics on the direction of the Indian economy, or the amount of money (foreign or domestic) sloshing around on the trading screens, one should remember that there is something else which drives stock prices: Corporate earnings.

    And a disappointment in the rate of growth of earnings could dampen sentiment on Dalal Street and depress share prices. We have all heard the mandarins in Delhi telling us how well the economy is doing and how corporate sales, profits, and earnings per shares have seen delirious levels of growth. But that is the past and stock markets are forward-looking animals which move on what is going to happen tomorrow, not what happened yesterday. But tomorrow does not look so good largely because the economy, strapped for cash and faced with infrastructural bottlenecks, could slow down. But a bigger danger lies from a government which, in its rush to increase revenues, could "amend" a few policies that would hurt overall profit growth and pooh-pooh this notion that reforms are an "irreversible" process.

    The tax man cometh..

    A study of 200 companies in The Quantum Stock Market Yearbook indicates that 56 companies pay ZERO corporate tax. Now, any Finance Minister, faced with gaping holes in his accounts is going to find these corporates a tempting target. Although the total tax collected from these corporates increased by 63% from Rs 19 billion in FY93 to Rs 30 billion (Rs 3,000 crores) in FY95, the effective tax rate of the companies declined from 23% to 16%. Call it tax on book profits, minimum tax, or whatever you want but Big Brother is not going to keep quiet. Especially when he's broke! Finance managers of zero-tax companies must be praying for miracles to be sustained.

    The ration mentality on forex..

    Another danger is the ration mentality on foreign exchange. In 1991, the government gave corporates major incentives to boost exports, liberalised trade and got everybody revved up on turning India into an Asian Tiger. The impression of most people (helped by all those full-page ads that tom-tom star trading house status) is that large corporates did export and earn dollars for India but, here again, the facts are a little different. The 200 companies in the Quantum study actually used more foreign exchange than they earned! The net foreign exchange used doubled from Rs 44 billion in FY93 to Rs 88 billion (Rs 8,800 crores) in FY95. A government concerned about depleting foreign exchange reserves and large debt repayments may regain the ration mentality for non-performers and net users of foreign exchange and punish the guilty by imposing an "fx tax" on net importers.

    The scarcity of money..

    Continued government deficits will limit the amount of money that corporate India can borrow compared to its needs to complete expansion programmes. Although balance sheets look healthy, that could change fairly quickly if the equity markets remain dead and corporates are forced to turn to debt instruments paying over 20% per annum interest charges. Higher debt levels and increased interest charges would also hurt profit margins. Between FY93 and FY95 overall debt declined by Rs 360 billion (Rs 36,000 crores) because of the large number of equity shares sold to domestic and international investors. With the domestic investor still shell shocked at the handling of his money by trusted institutions, his return to the equity markets will be subdued.

    The prescription..

    While most people are trying to figure out which doctor will be elected to take charge of a spluttering economy, it may be wise to predict what the prescription could be and try to stay one step ahead of the investment game. My vote is to stay in debt and keep away from the equity markets. Atleast until someone begins to give you the protection that you deserve for making all those risky equity investments. Until then let the punters do what they want on the NSE and let the analysts waste their time on figuring out why the market rose to 3,600 only to fall back to January levels.

     

     

    Equitymaster requests your view! Post a comment on "Rough weather ahead...". Click here!

      
     

    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407
     

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms

    MARKET STATS