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Stockmarkets: Illusion or reality?

Dec 8, 2006

With market experts predicting new highs for the BSE-Sensex every other day and the pink papers and business channels playing their role in glorifying the 'bull run', we as analysts are often posed with queries like 'Have the markets got re-rated?' The Sensex is currently trading at 23 times trailing 12 months earnings while the NSE-Nifty is trading at 21 times trailing 12 months earnings. These valuations by no yardstick make the Indian indices look reasonably valued.

The multibaggers...
 Price onPrice on% change
 Dec 7,2006Dec 6,2005 
BSE Sensex13,964 8,816 58%
S&P CNX Nifty4,011 2,662 51%
Zee Tele359 158 127%
A.C.C.1,130 526 115%
ABB3,898 1,890 106%
Grasim2,754 1,372 101%
Reliance1,299 669 94%
BHEL2,631 1,380 91%
Bharti Airtel636 341 87%
M&M846 472 79%
Gujarat Ambuja141 80 76%
SAIL 87 50 74%

Zee Telefilms: The recent image/brand makeover by the company along with efforts to improve content quality seems to have yielded positive results for the company. Also, the plans chalked out for de-merger and the consequent listing of its various businesses made the stock alluring to investors. Further, with discretionary incomes on the rise, media stocks in general and Zee in particular could see strong buying interest going forward.

A.C.C, Gujarat Ambuja and Grasim: While the volume growth in the cement sector was never in doubt, an extremely favorable demand supply scenario has led to quantum jump in the bottomline of cement companies, thus making them hot property. Also, with the global cement majors eyeing the Indian cement players for consolidation, the larger players in the sector were accorded valuations (on EV per ton basis) that were higher than some of their global peers. Nonetheless, their presence in a growing market and better operating parameters, helped them catch investor fancy over global rivals like Holcim and Lafarge, wherein high growth in developing economies was compared against rather sedate growth in mature economies like the European nations and the US.

ABB and BHEL: Mounting order backlogs and improved bargaining power in the domestic and global markets (especially the oil rich nations) made the stocks garner a firm footing in the investors' portfolio. In case of ABB, vibrations emanating from the parent regarding its increasing commitment towards taking the India operations to the next level increased investor confidence in the stock.

Reliance and Bharti Airtel: Both the stocks basically rode on the consumption story. While Reliance continued to diversify into myriad business interests, Bharti made the most of India's growing telecom subscriber base. Here too, keen interest from global players like Chevron and Vodafone kept investors glued to the stocks.

M&M: Indian automobile sector has never had it so good. M&M being amongst the leader of the pack in the UV and tractor segments, and with a growing international footprint, merited most of the laurels. This was more so with the company unlocking substantial value with the listing of its subsidiaries (Mahindra Finance and Tech Mahindra).

While the blue chip stocks have certainly continued to enthuse investors with their robust quarterly earnings reports and restructuring / expansion initiatives, it were also the mid caps that generated considerable flurry amongst investors. Infact, 50% of the top 50 gainers over the last one year amongst the BSE A group stocks were non-Sensex and non-NIFTY scrips. Thus, it is not only the 'Sensex' and 'Nifty' stocks that have been accorded a 're-rating' but also the select mid caps that have succeeded in proving their mettle amidst the behemoths.

What also drew our attention is the fact that select sectors like commodity, auto and engineering captured most of the gains while sectors like energy, pharma and textile remained laggards. Further, in sectors like banks and software, there were select sections like private banks and large software stocks that garnered investor interest. It thus can be comprehended that while the rally was not broad based in terms of sectors, it was not so also in terms of stocks.

Having said that, while we not wish to take a call on the markets, what needs to be pointed out is the fact that markets or stocks merit 're-rating' if and only if there is a permanent or very long term change in the fundamentals of the same. The Indian markets in general and the commodity or engineering sectors in particular do not deserve a re-rating on the speculation that there will be more Foreign Institutional Investors (FIIs) money pumped in or there will be more buildings or bridges constructed! The fact remains that while indeed some structural changes have led to the re-rating, still a lot needs to be done on the infrastructure front if robust long-term growth is to be achieved. It thus calls for adequate prudence and analysis on the part of the investors before buying in the 're-rating' story.

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