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Economy: A higher growth orbit

Aug 22, 2003

The BSE Sensex and the NSE Nifty are both currently at their two and a half year highs. To a large extent the improvement in the economic prospects of the country have led to this optimism. FIIs too are reflecting this bullishness. FII inflows in to the stock markets crossed the Rs 100 bn mark recently. If we compare the inflows of FIIs during the same period last year it was only about Rs 29 bn, about 30% of the current inflows this year.

Growth in the Indian economy seems set to achieve a higher level as compared to say in the last five years. There is all round support for the growth to be maintained, especially from the government. The government has been successful in carrying out a number of reforms (passing of electricity bill and banking sector reforms to mention a few). Its focus towards the divestment process has also started showing some signs of success. The thrust on infrastructure improvement will actually start bearing fruits in the medium to long term. From the political angle also we have witnessed a stable government, though coalition based, after a long period of time.

Industries are also becoming more and more efficient in terms of running their business (TISCO is the lowest cost steel (HRC) producer in the world, while Hindalco is the cheapest producer of aluminium in the world). Energy companies have posted better results than ever before. Similarly steel, aluminium and other commodity companies are also witnessing resurgence in demand and have been able to grow their topline significantly on account of higher realisations and volume growth. Auto sector has also started witnessing higher growth rates. Auto ancillary companies have gone global and are exporting auto components to international auto majors. Pharma companies have also increased their thrust in R&D and India is emerging as a centre for outsourcing in case of bulk drugs manufacturing. The R&D thrust on the other hand is transforming Indian pharma companies in to major players in the generics segment.

This apart the corporates have taken the advantages of falling interest rates and this has helped them to reduce their interest outgo, thereby improving profitability. Expansion in capacity is planned in a number of sectors like power, steel, petrochemicals, refinery, etc. This is coming after a long period of time and increased investments in the corporate front may further help in improving the economic growth. Also monsoons have remained normal so far during the current year and this will drive growth in the agricultural sector. This will consequently improve demand in sectors like FMCG and foods etc.

Index valuations have corrected to an extent after witnessing sluggishness for the past two years. Though on a short term basis valuations seem stretched in certain sectors (for example steel), considering the government thrust towards infrastructure spending and increased industrial activity, prospects for the economy and consequently the stock markets still look attractive on a long term basis. However one must exercise caution and not get carried away by sentiments and 'khabars', especially in a bull market.

Thorough analysis of the prospects of the economy, sector and companies has to be carried out before investing into any stock. A proper risk return trade-off should be kept in mind and abided by. If one does not have the capability to do these on his own he should not get carried away by rumours and instead get access to unbiased research and do some study before making his investment decisions. And discipline is one such factor one must keep in mind while investing , especially defining ones 'buy' and 'sell' limits.

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