Small is beautiful, both in stocks and in autos - Straight from the Hip by J Mulraj
Investing in India - Straight from the Hip by J Mulraj
Small is beautiful, both in stocks and in autos A  A  A

14 JANUARY 2008

When bull markets are raging, small cap stocks often become darlings of investors, provided one can exit before something undesirable hits the fan. In the auto industry, small has become beautiful. Tata Motors unveiled, at an auto show in Delhi, its Rs 1 lac ($2500) car called the Nano. Others joined the fray, with Bajaj Auto also showcasing its small car, though priced higher; one doubts if another competitor for Rs 1 lac would emerge soon. Tata Motors is also a partner in a car venture started by Frenchman Guy Negre, that plans to come out with a car that runs on compressed air!

This makes Tata Motors an interesting stock to watch. For, the Nano would not only find a huge market in price sensitive India, where it is bound to have a huge impact, converting many two wheel owners into car owners, but also abroad. For it would be liked abroad for its fuel efficient and environmentally friendly characteristics and would find a plethora of uses such as in intra community (golf courses, large plants etc) transport. At the Infosys Bengaluru campus, e.g. they use electric golf carts for inner campus movement. It is quite unlikely that anyone else could produce a 4 door car, with proper safety features and environmental aspects, at this price. Volkswagen is to introduce its famous Beetle but it will be at over Rs 10 lacs.

Last week the BSE-Sensex gained 140 points to end at 20827. The main contributors were ICICI Bank (249 points contribution) whilst Infosys with -82 and Tata Steel with - 58 were the main anchors, dragging it down. This, despite Infosys' better than expected results for the third quarter to Dec. ICICI was loved because the listing of its various subsidiaries would unlock shareholder value. The NSE-Nifty actually fell 74 points over the week to 6200.

Infosys fared better than expected, given the fact that over 60% of its billings is in US $, a currency weakening against the Indian rupee in which the firms accounts are presented. But, like Oliver, shareholders want more and, finding plenty of opportunities in the over 6000 listed Indian stocks, seek other investments.

Axis Bank produced excellent results for its third quarter to Dec, with total income going up 58% to Rs 2290 crores and net profit up a whopping 66% to Rs 306 crores. It has managed to increase CASA deposits and earn a mouth watering 1.4% return on assets.

The sensex is now nearing the 21K mark and could be expected to cross it shortly. However, one must be cautious. At present the sensex is propped up by the good performance of a handful of stocks, including DLF, ICICI Bank, Reliance and Reliance Energy. There is still some upside in them but whenever profit booking occurs in these the correction could be quite sharp.

The economic indicators revealed last week were not too encouraging. The index of industrial production (IIP) has, in the 8 month period Apr to Nov, grown at 9.2%, below the 10.9% achieved in the same period last year. November production of core items was down, including crude oil, petroleum refined products, cement and steel; only that of coal was up.

The reason is that the Government has not done enough to improve the country's infrastructure, be it roads, ports, power generation or public transport. Though the Nano will sell, there are no roads in the city good enough to drive on. The reason is simple, there is a continuing nest egg for corrupt officials in the repair of shoddy roads and hence a continuing reluctance to allow private sector to make them. Why not, instead, open up both inter city as well as intra city roads to the private sector, including, in the tender, an obligation (legally enforceable and pursueable) of maintaining them for 7 years as is, for example, done in Dubai. We have not developed affordable public transport except for the excellent subways in Delhi and Kolkata.

Even when we have well managed public sector companies, their working is hampered by officialdom. The largest telecom company, BSNL, has an obligation to service rural areas and, because it is owned by Government, became liable for writ legislation when it wanted to rapidly expand its mobile network. This delayed, and ultimately badly pared, the number of lines it can expand by. The 3 public sector refining companies (IOC, HPCL, BPCL) have been ruined by bearing the brunt of subsidy burden, only partially compensated much later, which is the responsibility of the Government. The largest oil exploration company, ONGC, was headless for months after the PMO first rejected, then ultimately accepted, the choice of CMD made by the Government's own committee!

Now, rubbing salt in their wounds, such 'navratnas' or nine jewels, are being threatened withdrawal of this status, which gives them a modicum of freedom, for non performance!

The buoyant secondary markets are allowing companies to raise money. The big one, of course, would be Reliance Power, which has ambitious plans in power generation. Future Capital, promoted by Pantaloon is seeking to raise Rs 490 crores (at the upper band of Rs 700-765) for setting up a financial equivalent of Big Bazaar, with a focus on consumer centric rather than product centric business. BSNL would be hiving off its tower business which would give it enormous value. Emaar MGF has got clearance for a Rs 7000 crore IPO whilst the Air India IPO has been postponed to the second half. It is estimated that about Rs 75000 crores will be raised through equity IPOs this year; and will be absorbed quite easily!

The next week, thus, would likely see the sensex cross 21K mark after which a correction would set in. Caution in the next rally, which could carry the sensex comfortably above 21000, would be advisable.

Disclosure: The author or his family has no holding in Tata Motors.

J Mulraj is a stock market columnist and observer of long standing. His weekly column on stock markets has run for over 27 years. An MBA from IIM Calcutta, he has been a member of the BSE. He is Conference Head - India, for Euromoney. A keen observer of events and trends, he writes in a lucid yet readable style and takes up issues on behalf of the individual investor. Nothing pleases him more than a reader who confesses having no interest in stock markets yet being a reader of his columns. His other interests include reading, both fiction and non-fiction, bridge, snooker and chess.

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