• JUNE 24, 2005

Are you benchmarking the Sensex?

The 'Sensitive' index as it is very rightly called is currently at its palpable best. The economic buoyancy, growth potentials and positive upsides have all been emancipated to the hilt and the index is racing northwards at a scorching pace.

When we asked our investors whether they considered the BSE-Sensex as the lead indicator of their investment decisions a majority 50% opined in the positive, while the number of those who negated were a close 46%. While we do not deny the significance of strength in the indices as indicators of the rejuvenating India Inc, mishappenings like the Black Monday (11th May 2004) and tech bubble burst continue to linger in the memory.

Here again, it must be clearly pointed out that the scenario today is distinctly different from that witnessed during the tech boom. Certain lead indicators of the same can be enumerated as follows:

  1. Most of the capex is being funded from internal accruals

  2. The debt levels are very comfortable especially due to lower interest rates

  3. Global policy compliances and corporate governance are diligently followed norms.

However there are certain concerns that force us to view the current valuations with a tinge of suspicion as to whether they are truly sustainable. Here we enlist some of those.

Currency strength against dollar: We have all heard the famous fable of the tortoise winning a race against the hare. It was not because the tortoise was faster than the hare, but because the hare slept while the tortoise ran. The strengthening of the rupee is similarly not because of inherent strength in the currency but because of weakness in the dollar! It is also a fact worth noting that in the last 12 months while the rupee has gained 8% against the Dollar, it has also depreciated by 5% against the Pound. With a correction in the fiscal deficit levels, the swing in currency valuations is thus inevitable. Not to mention of the 'hot' Foreign Institutional Investors (FIIs) money that will flow away with the same and orphan the Indian equity markets.

Rising exports: Opening up of the economy has offered a plethora of opportunities to Indian corporates, to vend their low cost products in the lucrative overseas markets. The corporates themselves have left no stone unturned to tap the 'foreign potential'. As a result of this, a very healthy portion of the domestic output is today reserved for exports. But what is being ignored is the fact that while exports are rising fast, imports are rising even faster. This is but certainly not helping our current account deficits. This phenomenon also reinforces the fact that a capital hungry economy like India will continue to swallow all that comes and any shortage in the inward fund flow could choke the country's growth trajectory.

To conclude...
Our intention here is to not act as doomsayers but to only highlight our concerns on the possible threats to the 'India shining' story. Also, if we make a historical comparison of the year on year growth in exports and rupee appreciation against the gains in capital markets, our fears are refurbished by the fact that the current buoyancy in the capital markets is undue given the marginal improvements in the said economic parameters. Nevertheless, while our stand on India Inc remains bullish from a long-term perspective the only advice we would like to give investors are two golden rules of investing:

  1. Do not lose money

  2. Do not forget the first rule

Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (Research Analyst) bearing Registration No. INH000000537 (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA, Canada or the European Union countries, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

Equitymaster Agora Research Private Limited (Research Analyst)
103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407