• JUNE 1, 2005

Stockmarkets: Taking stock...

This is inarguably not a good time for an investor who is sitting on cash waiting to enter the stock markets, as they trade near their all-time highs, or for one who is already fully invested and doesn't know when to sell, as they remain unaware of what's in store for India Inc. going forward. However, while we wouldn't be throwing light on how to time the markets (simply because we don't believe in this theory), we can say one thing for sure that India Inc. has once again proved its mettle, going by its FY05 performance, and continues to roar and march ahead in the face of adversities thrown up against it. We take a look at the likely possible scenario going forward and gauge whether this performance can atleast be sustained, if not improved upon.

India Inc.: FY05 performance
 Net SalesNet Profit

As mentioned previously, the adjacent table clearly shows the robust YoY performance of about 300 companies (approx. 170 in 4QFY05) from our Quantum universe in the four quarters of the previous fiscal. Both, sales and net profit growth have been pretty strong in the period under consideration. Thus, for the full year (FY05), the consolidated YoY net profit growth was at 26% on the back of an 18% YoY topline growth. Another indication of the improving performance is the fact that the net profit margins have improved from about 8% in 1QFY05 to about 12% in 4QFY05. Further, our numbers reveal that for the full year, these have improved by about 70 basis points in FY05. This is commendable considering the fact that Indian companies (like other corporates around the globe) have had to face the odds in terms of high commodity and energy prices.

However, this performance is now a thing of the past and investments are made on the expected future performance of the market/stock. And there is more than one factor that goes into judging what the future course would be. Some of the factors that would determine the future performance of companies are reforms, monsoons, domestic interest rates and commodity & energy prices.

Reforms: There has been increasing positive intent being displayed by the government regarding the continuation of the reforms process. This was, in recent times, depicted by the FDI enhancement and divestment moves announced by it. Going forward, we believe that while the reforms process would by and large continue, one can expect hurdles on the way considering the coalition nature of the government.

Monsoons: This is being touted as the next 'big' trigger for the Indian stock markets. The relevance of monsoons can be gauged from the fact that almost 65% to 70% of the Indian population is dependant on agriculture for its livelihood. Thus, scanty/low and/or unevenly spread rainfall would affect crops and consequently the spending power of rural India, which is the key source of demand for many goods manufactured by Indian companies. Going forward, while the government has initiated plans pertaining to improving the irrigation facilities so as to decrease the dependence on rain Gods, the fact remains that this is a long drawn process and much of it depends on the government's will to implement the same, successfully. Till then, monsoons would continue to play an important role in determining the fate of the country's growth prospects.

Domestic interest rates: Though interest rates have been on the rise, the quantum of it has seemingly not stalled economic growth as yet. And considering that the government has time and again made public its intentions of maintaining a soft interest rate regime, Indian corporates would continue to benefit from the same. With demand and profit growth being strong, most of the companies have cleaned their balance sheets by reducing their debt flab. Thus, with debt servicing obligations being much lower than what it was 2-3 years ago, it augurs well for the shareholders.

Commodity & energy prices: The world has been witnessing a period of high commodity (ferrous and non-ferrous metals) and energy prices. However, most of the Indian companies have managed to tackle the situation well by taking concrete efforts at controlling other expenditure heads so as to mitigate the negative impact of rising input costs. Thus, going forward, with the operational efficiencies now having been achieved, any cool-off in commodity and energy prices, which is already being witnessed, would only aid margin growth for companies.

After considering all of the above, with monsoons being the only grey area, we believe that Indian equities would continue to deliver decent returns over the long term, as the above factors seem to be largely favoring continued growth for Indian companies, though the growth rates could stabilise at lower levels. Further, from the stock market perspective, it must be noted that at the current juncture, the P/E valuation of the BSE-Sensex is at about 15x trailing 12-month earnings and considering the past performance, it is very much possible that the average growth rate of Indian companies would be maintained above 15% per annum over the next 2-3 years. Thus, while the markets remain fairly attractive from the long-term perspective, considering the huge run up stock prices over the last couple of years, investors will have to work harder to identify a viable investment option.

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