Oct 7, 2003|
Poll: Tread with caution
With the markets touching new highs on a daily basis, one wonders as to how long this party is likely to last and whether such optimism is warranted at this stage or not. In this context, we asked our audience regarding their view on the stock markets and their expectations regarding level of the Sensex in the next one-year.
Our poll asked our audience as to where they expected the Sensex to reach in a year's time. A majority (71%) of the respondents indicated that they saw the Sensex in the range between 4,600 and 4,800 points. Nearly 15% of the audience indicated that they expected the Sensex to trade below 4,200, while the rest indicated that the Sensex would trade in the range of 4,200-4,500 levels.
The poll clearly indicates that investors are reasonably bullish about the stocks markets in the next one year. However, we would like to point out that the rally seen during the last week and the beginning of this week has already pushed the Sensex over the 4,600 mark and so, to that extent, a majority of our audience's opinion stands vindicated. As we have mentioned in the past, while the optimism may not be misplaced, the strength of the same may not be warranted.
The prospects of the Indian economy do warrant a certain level of optimism, especially since all segments of the GDP, i.e. agriculture, manufacturing and services, are showing signs of strength. Let us, for instance, consider in brief key positives and negatives for the stock market from a short-term perspective of one year and beyond that.
Firstly, according to CMIE, the economic research agency, the country has witnessed rainfall in excess of 3% of normal levels for the first half of the fiscal year 2004. The number of regions that have seen excess rainfall as a percentage of gross cropped area in this period is at 28%, highest in the last 5 years. Percentage of gross cropped area that have received normal or excess rainfall is estimated at 95% by CMIE, which is also a five-year high. Monsoon, per se, have not disappointed the stock markets.
What this good monsoon means to the agricultural sector, that has suffered in the last three years due to the vagaries of monsoons, cannot be understated. While CMIE expects agricultural production to increase by 9% in FY04, food grain output is likely to touch 202 million tonnes. Just to put things in perspective, this is the fourth highest in the last nine years.
Given the fact that almost 70% of the populace depends on agricultural output for their daily livelihood, higher production augurs well for the rural sector. Income level in the hands of people could rise thus providing a fillip to consumption, albeit to an extent. The rather strong co-relation between agricultural sector growth and GDP growth is exhibited in the graph below. This, combined with other external and internal economic indicators like interest rates, inflation, forex reserves and foreign money inflow, adds to the optimism.
Coming to corporate profitability, most of the index companies, if one were to take this as a sample, have restructured or close to completing the restructuring exercise initiated in 1997. Significant improvement in productivity (sales per employee), asset turnover (indicating the effective utilisation of fixed assets), interest coverage, reduction in working capital requirement and the consequent release of cash to retire high cost debts are big positives. Given the fact that revenue prospects are promising for FY04 and in the long run, net profit could grow at much faster rate. Therefore, if one were to look at the P/E ratio (price to earnings), the 'E' side looks promising. Just to put things in perspective, a study by us shows that net profit of index companies have grown at a CAGR of 17% for the period between FY97-FY02.
Coming to the foreign money inflows, the slowdown in US, the European and Japanese economies have resulted in global fund houses looking at emerging markets as investment avenues. Hence, India with its high estimated growth variables could attract higher foreign inflows going forward.
While the positives are many, there are concerns as well from a short-term perspective. If one were to look at the top five gainers over the last month or so, large market capitalization stocks are completely absent. Just to put things in perspective, the top gainers list in the BSE 'A' group goes like this HCL Infosys, Aurobindo Pharma, Sesa Goa, Moser Baer and Saw Pipes. Except from some stocks like Ashok Leyland, P&G, M&M, Infosys and Zee, the top 25 gainers list consist primarily of mid-cap stocks.
This indicates that investors may be buying stocks because the stock market, as a whole, is showing positive signs. This is a risky practice for the retail investor as they land up investing in stocks that have weak fundamental and land up being shortchanged. Investors need to buy stocks based solely on fundamentals. This is important because the risk return profile of stocks have changed when one considers the recent rally. Though the long-term prospects remain promising, probably, it is time to tone down return expectations from equities for the future. Caution may help in the long-term.
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