• JUNE 1, 2004

Equities: Think long-term...

The last one month's performance of the sectoral indices could make even the optimistic investors have a re-look at their investments. With the change on the political side and changing views in the markets vastly influenced by factors such as disinvestment and reforms, the BSE Sensex has shed over 10%. Lets' analyze as to what went wrong that the once fundamentally sound scrips are now facing the brunt.

PSU Index: The worst hit during the period was the PSU index with losses to the tune of 20% during the month. A lot of sentimental value had been added into the PSU (mainly energy) stocks on account of disinvestment and reforms. To put things in perspective, HPCL, which was trading at Rs 226 a year earlier, touched a high of Rs 542 on the news of disinvestment. However, with the change in the government and the new government's clear stance on not privatizing the company, the stock has come back to Rs 299 levels. On the other hand, GAIL and ONGC have been suffering due to the uncertainty as to whether these upstream companies shall continue to take the burden of the subsidies on account of under-recoveries of LPG and kerosene.

Although fundamentally sound business profile, the two majors have lost 30% and 26% over the month. We would like to state that fundamentally, GAIL has huge business potential and that with increasing volumes of natural gas (thanks to Petronet LNG) and increasing demand for LPG, growth prospects are promising. On the other hand, with every US$ 1 increase in crude oil prices, ONGC adds Rs 9 bn to the revenues. Although we believe oil prices might soften, given that India imports 70% of crude oil, the company is heading in the right direction by acquiring oil equity abroad.

BSE Bankex: The previous government had shown clear indications of bringing down the government stake in PSU banks to 33% while increasing the FDI limits. However, with the current government in no mood of increasing FDI limits or selling off its stake, the money is going out of banking stocks. At the current juncture, we would like to re-iterate that disinvestment is just one of the sentimental factors and should not be held as the only criteria to buy a stock or not. There is a lot more to it than just divestment. Having said that, as we have maintained in the last three to four months, we remain cautious about the growth prospects of the banking sector. Issues like a possible rise in interest rates, the consequent impact on retail credit demand and other income are of significance.

BSE Tech: Surprisingly, tech stocks have maintained their positive run during the month with a gain of nearly 3%. This is one sector, which shall not be affected much with the change in the government. Software companies in India are largely affected by international events such as outsourcing backlash rather than domestic policies, which have been indicated to continue at the same pace. India is fast becoming a hub of software outsourcing and in order to consolidate further, we need to climb the value chain. Strong numbers reported by the software majors have re-imposed the faith in the outsourcing story. But arguments like the 'defensive' nature of the sector by experts, in our view, are overplayed.

Given the above view, we believe the markets have over-reacted to the political factors letting the fundamentals take a backseat. The new government has been in place for just about a week and it needs to be given the time to bring in some clarity on its economic agenda. At this point, we would like to quote Mr. Ajit Dayal "The buying opportunity has begun...". But plan your investment in equities in a staggered manner. We believe that at current valuation levels, equities continue to remain an attractive investment avenue for the long-term on a relative basis. We re-iterate what we said earlier on our website.

  1. Look beyond 'disinvestments'. There are fundamentally sound companies in the PSU sector as well from a long-term perspective. Yes, there is uncertainty over the rise in crude prices and the impact on the same on profits, if petroleum product prices are not raised. But for how long? Rationality will prevail at the end (be it the government or the investing public).

  2. Services contributes to 50% of India's GDP. Will Indian software and pharma major be affected because of the new government? Are these companies hiring at a slower rate? The answer is No. Having said that, we believe that these sectors being portrayed as 'defensives' by experts is overplayed. But yes, the fundamental story is intact.

  3. There could be some impact on consumer demand for durables and cars if interest rates were to rise (which is expected). So, one has to exercise caution in sectors like automobiles and related sectors.

  4. Yes, there will be impact on the infrastructure related companies (power, engineering and cement) if the new government repeals/softens some bills/initiatives that are already passed.

  5. But the new government has been constantly talking about providing a fillip to the agricultural sector (70% of the population and 25% of the country's GDP). Are investors overlooking this sector?

The point we are trying to make is that stock markets always take time to reward performance. Keep in mind that stock prices tend to follow the long-term profit growth prospects of any company. It is just a matter of looking beyond who is selling and why is he selling?

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