Rally hopeful beyond initial dip. - Straight from the Hip by J Mulraj

Rally hopeful beyond initial dip.

21 APRIL 2008

In an effort to contain inflation, the Reserve Bank of India has increased CRR (cash reserve ratio) by 50 basis points, or half a percent, to be effected in two equal stages on April 26 and May 10. Through this, it will take our some Rs 18,500 crores liquidity from the banking system. Rising interest rates would also have the effect of stanching the appreciation of the rupee versus the dollar, and thus benefit exporters of goods and services.

Throwing in his weight in the battle against inflation, Finance Minister Chidambaram threatened to come down heavily against steel and cement companies. There are even foolish calls to ban exports of steel; those making such asinine calls have no idea of how long it takes to develop customer relationships and how quickly they can break.

One of the main reasons for inflation, however, is low productivity and one of the principal causes of that is this sort of senseless meddling by officialdom seeking to blame others for their own follies. These follies include a failure of Government to control its own expenses, fudging its books by tricks such as off balance sheets Oil Bonds (had a private sector firm done that it would have been pulled up by the Finance Ministry, but who will bell the FM?), excessive control over some sectors such as the financial sector, policies that stymie agricultural productivity and a neglect of infrastructure that pushes up cost of doing business.

The fiscal deficit is out of control if one takes into account the fudging tricks like issuing bonds redeemable in future, which do not show up in the Budget. This, despite the fact that direct tax revenues are up 40% this year, to Rs 310,000 crores. Look at the corridors of any Government office, or get stuck in a road block and witness any cavalcade of cars, to see how much wastage there is in Government which could easily be cut.

A committee under Prof Raghuram Rajan on the financial sector, has made some sensible suggestions. It is of the opinion that excessive public sector control over the financial sector is bringing down GDP by 1 to 2% points and doing injustice to everyone, including depositors (who get less interest than they deserve), borrowers (who pay more interest than they would need to) and only benefit the Government, which lays first claim on funds, crowding out other borrowers who would use it more productively.

Last week the market was happy with Infosy's results and guidance, and rallied, with the BSE-Sensex ending the week up 673 points, at 16481. Of this gain, Infosys accounted for 173, Reliance for 92 and ICICI Bank for 75. The NSE-Nifty added 181 points to close at 4958.

Infosys's consolidated revenue was Rs 16,692 crores, up 20.1% and PAT was Rs 4659 crores, up 20.8%, which is commendable seeing that the $, in which a lot of its billing is done, fell some 11%. Its guidance for the next year, with a 19-21% sales growth, and a 16-18% profit growth, is what enthused the stock price and the market. Should there be more increases in interest rates to fight inflation, the rupee fall would be arrested and it may even appreciate (Goldman Sachs expects a 4% appreciation this year). One would not be surprised if Infosys came out with a major acquisition this year, with valuations (and seller expectations) having gone down.

Reliance is also expected to declare encouraging results for the year ending Mar. Its stock was buoyed by a news report, not confirmed by its management, about Shell eying a 30% stake in some KG Blocks, for $ 6.7 b. which would place the value of the 14 tcf reserves announced thus far, at a whopping $ 22b. RIL has filed a petition in the Supreme Court over a stay order granted by the AP High court, for status quo to be maintained on some 5.4 km of pipeline. Since gas, a vital energy resource, is due to be produced from June, it would need to be evacuated and put to use fast and can't be left to the slow pace of judicial movements.

Reliance Power has got permission to raise $ 2b through ECB for its ultra mega power project at Sasan. Given the inability of Government to control the 40% theft of power, or non billing of it, and given India's growing economy, we would need huge capacities (over $100 b. in investment in this 5 year plan) if we have to grow. The CMIE is predicting a GDP growth of 9.5% in this year, which seems a bit high.

In the coming week there could be an initial dip because of the hike in CRR but one could expect the market to continue its rally. That would give an opportunity to exit at a higher level.

The problems of stupid lending are not over. JP Morgan may take a $ 5 b. hit. Merrill Lynch may be forced to take a $ 6-8 b. charge and is sacking 3000 people. Citi is looking at a quarterly loss of $ 5 b. All are required to mark to market assets (securities mortgages) for which there is no market! The US Fed is trying to prevent a collapse by lending to investment banks and finding innovative ways in which to rescue failed firms like Bear Sterns. For the moment its actions seem to have had a calming effect. It would last till the next subprime worm lifts its head out of the woodwork.

There seems to be strength in this rally (another 1000 points on the sensex maybe?), perhaps after an initial fall, but it would be advisable to lighten.

Have you read the latest Honest Truth by Ajit Dayal?

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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