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The India Inc. push

Jul 31, 2004

The indices continued their run on the bourses this week also propped up by positive investor sentiments, which in turn are buoyed by the India Inc. scorecard for the June 2004 quarter. Corporate India continued to dole out largely impressive results that helped the indices gain nearly 2% despite many of the concerns that continue to lurk in the background. FIIs also seem to have come to terms with the fact of the new government at the Centre and the final adjustments made to the turnover tax (see chart below).

The trading this week began with the overhang of the GTB crisis, which saw the indices opening weak despite the over 2.5% gains that it ended with last week. Of course, Monday's trade was bound to see some initial jitters. However, rationality soon set in and the indices headed towards a recovery. Despite the larger domestic concerns pertaining to below than normal monsoons this season, the effect of the continuous rise in crude prices, its effect on inflation and consequently on interest rates, investors seemed to have shrugged these off for the moment. The primary reason for this is the sustained performance of India Inc. in the June quarter, which seems to have brought investors back to the markets.

Though Tuesday's trade did witness a bout of profit booking by investors and some consolidation was witnessed during Wednesday's trade, which could also be attributed to the impending derivatives settlement on Thursday, the final two days of the week once again saw action return on the bourses. Active participation by Foreign Institutional Investors (FIIs) seemed to have also aided market strength. This is a positive considering that it is after a considerable period of time (2-3 months) that FII inflows have been a positive for an entire fortnight (second half of July).

Key gainers over the week (NSE-50)
COMPANY Price on
July 23 (Rs)
Price on
July 30 (Rs)
%
CHANGE
52-WEEK
H/L (Rs)
BSE-SENSEX 5,073 5,170 1.9% 6,250 / 3,722
S&P CNX NIFTY 1,602 1,632 1.9% 2,015 / 1,165
SCI 114 125 9.6% 203 / 61
TISCO 364 392 7.8% 490 / 206
VSNL 168 181 7.7% 210 / 109
SAIL 37 40 7.1% 62 / 21
INFOSYS 1,455 1,554 6.8% 1545 / 755

Now, considering the two big developments that took centre stage during the week (apart from the results):

The proposed merger of the troubled Financial Institution (FI) IDBI with IDBI Bank has finally been approved. The new entity IDBI Ltd. is likely to take effect in a couple of months. The deal would propel IDBI Bank to India's top of the league banks in terms of market value at the current market prices apart from giving it access to larger funds required for expansion. For IDBI, the move was necessary to bring the term lender out of a financial trough owing to substantial bad loans on its books. Further, IDBI, post the merger, would have the advantage of low cost funds in the form of access to current and savings accounts deposits. It must be noted that earlier, the Budget has already proposed to provide a Rs 90 bn support to the FI in the form of transferring its bad loans worth this amount to an asset restructuring fund. During the week, while IDBI closed with gains of 6%, IDBI Bank notched gains of 17%.

The other big news was the moratorium imposed over Global Trust Bank (GTB) and the subsequent announcement of its merger with the zero-NPA bank, Oriental Bank of Commerce (OBC). The positive for OBC, as per management statements made public, in this bargain is that the bank, which has a relatively larger presence in the northern parts of the country, will get access to the southern part, thus giving it a greater reach and a near national presence. Further, it will also get access to GTB's 0.8 m depositors. Also, apart from the tax benefits that are to be provided to OBC for acquiring GTB, the management has expressed optimism with respect to the recovery of the acquired NPAs. However, the markets seemed to be thinking otherwise as the stock was down 9% over the week.

Key losers over the week (NSE-50)
COMPANY Price on
July 23 (Rs)
Price on
July 30 (Rs)
%
CHANGE
52-WEEK
H/L (Rs)
OBC 263 239 -8.9% 367 / 149
PNB 282 268 -5.2% 397 / 149
MTNL 136 130 -5.0% 166 / 92
SBI 464 442 -4.8% 690 / 390
TATA POWER 275 264 -3.8% 450 / 143

Over the past one-month and especially the last couple of weeks, the whole of the corporate world, analysts and investors were glued into results. However, now that the results season is over, the focus will shift from individual companies' performance, which is now history, to more macro views (as to cues about what next for the company) and the economy as a whole. Going into next week, the markets will open with a fresh perspective. The caveat here, however, would be that all the above-mentioned concerns with respect to our economy will now re-surface and a view will be formed keeping these in mind.

To conclude, we would once again like to re-iterate that at the current juncture, the P/E valuation of the benchmark index is at about 14x trailing 12-month earnings and 12x FY05 expected earnings estimates, 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 an average P/E valuation of about 16x, 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 the reforms process currently underway in the country, the environment looks conducive for growth for corporate India and thus we believe that equities would continue to deliver decent returns over the long term. 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. Happy investing!

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