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Divestment Vs value - Views on News from Equitymaster
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  • Oct 4, 2002

    Divestment Vs value

    The PSU stocks were back in reckoning yesterday after comments by the Prime Minister. Official statement is that divestment has not been halted. But all is not well. Mr. Ram Naik, the Petroleum Minister, feels that divestments in the oil-marketing majors HPCL and BPCL should not be through the strategic route.

    Thus, the future courses of events related to divestment of PSUs is likely to be full of 'twists and turns'. And with every development the markets will cheer in joy or sigh in despair, as they have done in the past.

    Therefore, investing in these stocks could be quite a risky proposition for retail investors. Do you want your hard earned savings to be at the mercy of whims and fancy of some ministers who are not necessarily motivated by economic compulsions? Or would you like to invest your savings with a group of professionals who have a clear understanding of their business with a blue print for the future and are willing to share wealth with you?

    The case against investing in blue chips like HLL is that the growth prospects in the near future do not seem exciting due to a sluggish domestic economy. Well, death and taxes are certain. So are business cycles. Further, signals that bourses outside send out may not be as relevant in the Indian context. While the western economy is suffering due to frenzied investments taking place, which resulted into building up of significant over capacity, Indian economic has been sluggish partly due to bad monsoons in the past.

    However, the positive impact of strong agricultural growth (5.9%) in FY02 has been felt by the industry in the first few months of the fiscal FY03. Infact, the Index of Industrial Production (General) grew by 4.7% in the first four months of FY03, as compared to 2.3% in the corresponding period last year. Also, the first quarter GDP numbers released by the CSO, points a strong growth of 6%. The agricultural sector grew by 4.4% as compared to 1.1% in the first quarter of FY02. The growth in the manufacturing sector was 3.8% compared to 2.7% 1QFY02.

    It is more than likely that the strong growth in agriculture will not be sustained due to delay in rains, which will affect the Kharif crop. This will take a toll on rural consumption, which is responsible for a significant element of growth in demand. However, the Rabi crop that will be harvested in April is likely to be normal.

    Thus, if you are convinced about the growth potential of the Indian economy, it makes sense to invest in blue chips that are trading at attractive valuations. The depressed sentiment on the bourses is also due to investors shying away, as they have been cheated time and again. Further, the government has failed to bring the guilty to justice. The lesson here is even if there is immense growth potential, a retail investor stands to gain only if the management is willing to share the wealth created. Thus, management credibility is equally important.



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