Move over, Disney World, here comes Dalal Street - Straight from the Hip by J Mulraj
Investing in India - Straight from the Hip by J Mulraj
Move over, Disney World, here comes Dalal Street A  A  A

28 JANUARY 2008

One doesn't need to go to Disney World in Florida to experience the thrills of a rollercoaster ride; one can get it by simply entering Dalal Street. Contemptuously contrary to this columnist's belief that there would be an early bounce, perhaps on Monday, prior to an expected cut in the discount rate by the US Federal Reserve (which was actually sharper than expected), the markets started slipping on Monday itself! It was, in fact, a global meltdown with the sensex dropping 7.3%, or a teeth shattering 1407 points, in the company of Germany (6.1), China and Brazil (5.1) and Hong Kong (4.9). Just in case investors got complacent thinking the worst was over, the market proved them wrong by dropping another 876 points on Tuesday, contributed, in great measure, by the closure of buying terminals of several brokers. Even those with money to invest could not do so, exacerbating the fall. In short, the slowness of the banking system in clearing cheques combined with the measures put in by the stock markets to avert payments crisis, combined to cause a deeper fall.

In true rollercoaster style, there was a sharp pullback of 864 points on Wednesday, almost compensating for Tuesday's drop, to be quickly followed by a 372 point drop the next day! Investor confidence was shaken in less than two weeks. On Friday, FIIs, who had been net sellers, turned buyers and, alongwith domestic funds, pulled up the index a whopping 1140 points. Interestingly, domestic funds were net buyers throughout the week! Are they, through instincts of local investors closer to the ground, getting a better feel of the trend than FIIs?

The US Fed, as stated, cut discount rate by 0.75% (75 basis points), sharper than the 50 basis many expected, in a bid to pump in more money to stave off a sharper recession, rather, says Ajit Dayal, like a bartender pouring another round of drinks to an inebriated crowd (see 'Britney and Ben'). This does not solve the basic problem with the American economy which is consumption led with consumer spending accounting for 65% of the GDP. The basic problem is that consumers spend much more than they earn. So long as other assets such as their homes and their stocks were moving up, thanks to increased money supply, consumers took comfort in appreciating assets to spend more. How will they behave now that asset prices are declining?

For the moment, though, with bartender Ben Bernanke having poured another round of drinks, the party looks like it will continue. He is joined by bartender George who, with the support of Democrat led Congress, has cleared a $ 150 b. fiscal stimulus to the economy.

Excess money, plus the pressure of investors for quarterly performance, has led to some pretty foolish investment decisions. Most of the well known names such as Citi, Merrill, HSBC etc. have been caught with their pants down and had to write off huge losses for lending to ninjas (short for borrowers with no income, no jobs or assets), aka subprime loans. They had to be bailed out with sovereign funds. Last week French Bank Societe General announced a $7.1 b. loss due to a rogue trader, a la Nick Leeson who brought down Barings.

Thus the monetary and fiscal injection provided in the US would, for the moment, create a party atmosphere, but the structural problems would have to be addressed.

Closer home, corporate results for the quarter to Dec are quite good. Tata Steel announced consolidated (with Corus) turnover of Rs 63,872 crores, and a net profit of Rs 9,645 crores! It is proving detractors of its Corus acquisition wrong. ONGC's net profit was slightly lower at Rs 4,366 crores for the third quarter (v/s 4,668) but after giving Rs 13,528 crores as discount to refiners as its share of the subsidy burden that ought to be in the Budget. Not only does this make a mockery of books of the Government and of all the companies providing the subsidy, but it is paving the way for an environmental nightmare. Subsidised petrol is encouraging sale of cars and, as the stock of vehicles increases, so does the challenge of finding an alternative fuel source to petrol, as fossil fuels run out. And so does the damage to the environment. And, in a Kafkaesque twist, all supported by the Left parties! Bank of India doubled its quarterly net profit to Rs 511 crores whilst SBI's were up 70% to Rs 1,808 crores.

Infosys may have lost its fancy due to the appreciating rupee putting a dent on its margins, but it is second to none in the quality of its corporate governance. As proved last week when its audit committee imposed a fine of Rs 5 lacs on its CEO, Kris Gopalakrishanan, and of $ 2,000 on an independent director, for what was an inadvertent transgression of insider trading regulations in as much as they failed to report a transaction within the stipulated time. More commendably, the fines were asked to be paid by the transgressors, to their favourite charities! The company, its board and management need to be complimented for setting such standards! Kudos!

IT services are expected to grow at 23% CAGR to reach $ 10.7 b. by 2011.

In stark contrast is the way the Government runs public sector companies. BSNL, the largest telecom company wholly owned by the Government, needs to make an IPO so as to fund its capex plans of Rs 60,000 crores till 2010, of which Rs 18,000 crores need to be spent in 08-09. There is absolutely no reason why BSNL's management, a competent one, ought not to be allowed to decide how it should fund this capex. Teledensity is still low at 23.9% showing plenty of room for growth. Perhaps the Left secretly desires that the private sector take the most advantage of this potential by curbing the growth of BSNL. The telecom minister emulates Niro and dithers over the decision, because the Left parties oppose a sale! Why don't we try trading places; let the senior politicians become CEOs and CFOs and let the latter become ministers. Perhaps at least one will get it right!

With such volatility it is silly to try and forecast market movements in the coming week. But given the extra round of drinks being poured by bartenders Ben and George, and given that India remains a growth story, buying fundamentally good stocks on dips would be a sound policy to follow.

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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