No one shouted May day, rally continues

5 MAY 2008

The rally continues, spurred by an RBI credit policy which did not change interest rates (but hiked CRR by 25 basis points to suck out some more liquidity) and by some encouraging corporate results, such as those of DLF which made a fourth quarter profit of a whopping Rs 2176 crores! The BSE sensex rose 474 points over the week, ending at 17,600 and the NSE Nifty added 116 to end at 5228.

Other than DLF, Q4 PAT growth was encouraging at Reliance Communication (47%), Hindalco 49%, HDFC 40% and Corporation Bank (73%). Some more results in the next two weeks of the larger companies could enthuse investors and take the sensex up perhaps another 1000. Between now and then would be a good time to get lighter, as the next move would in all likelihood be south.

The RBI did not raise interest rates because the interbank rate is closer to the reverse repo rate so an increase would not really help suck out liquidity. The RBI Governor sees GDP growing at 8.1% this year, with a 35% gross domestic savings rate and a 36% gross domestic capital formation.

Though PAT growth has been generally encouraging, margins are under pressure by increased interest cost. According to Multi Consult P Ltd, for the quarter ended march 2008, sales of 818 companies are up 22%; interest cost up 41% and profit after tax up only 17%. This quarter shows a combination of higher interest cost and the squeeze on margins. One concern is that, in order to combat inflation, which will become a political hot potato as elections approach, interest rates would need to be raised, sacrificing a bit of growth in the process. In areas where consumers rely on borrowing (automobiles, consumer durables, housing) this could impact demand and squeeze margins. Inflation is already at 7.57%, too high for comfort. Computation of inflation does not include several items (such as rent) which are commonly used; probably so as to contain the wages of Government employees which are linked to the official computation.

Globally, the falling interest rate cycle could be coming to an end and if the US currency weakens further, may call for a rise in rates to stanch the fall. One of the factors that can lead to a further weakening would be if other oil producing countries follow the example of Iran, which has reportedly stopped quoting for its oil in $ and uses a mix of yen and euro. Were others to follow suit, the US $ could come under greater pressure.

In the telecom sector, introduction of mobile number portability is likely to take some more time. This is the only thing that would bring in true competition for customer retention and so improve service standards. There is enough competition for customer acquisition (witness the slashing by Bharti Airtel of long distance telephony rates and roaming charges) but none for customer retention. Customers are locked into a provider because the hassle of informing contacts (and thus of losing out on some) makes them suffer inadequate service.

The Supreme Court has determined that R Comm and Tata Teleservices, which provided mobility on their fixed line networks, would be liable to pay ADC (access deficit charges) to BSNL of Rs 400 crores and Rs 300 crores respectively. R Comm claims to have already provided it in its accounts, with no impact on future profit statements. BSNL, on its part, is taking TRAI (the regulatory authority) for having phased out ADC, as it continues to provide telecom services in unviable areas, for which the ADC levy was introduced.

The Government is expected to sell big blocks of stock in 3 companies held by SUUTI, the entity that was formed to take over the assets of US 64 when it collapsed. It will start with the 27% stake in Axis Bank which is expected to be sold to various institutional bidders and fetch over Rs 9000 crores. Then will come its holding in L&T and in ITC. ITC's stake sale could well attract the attention of BAT, which has been trying to get majority control and, with it, management control, for a long time. With tobacco consumption declining in developed countries, BAT, Philip Morris and others are trying hard to get into developing countries like China and India, where sales are rising yet and profits are enormous. The tobacco used by foreign brands, however, is different from the variety grown in India, and tobacco farmers would find the going tough should local brands which use the local variety be phased out.

The rally can thus continue for a week or two, spurred on by more corporate results which are encouraging. One ought to use it to get lighter. There are too many imponderables for comfort at these levels. Not least being the poor fiscal health of the country and the neglect of planning for the future. Goldman Sachs says India is the worst amongst the BRIC countries in its spend on education. If only political leaders were to concentrate their minds on such matters, of planning for the future, rather than, as they do, on whether cheer leaders are needed, or whether actors should stop smoking in movies or other inane matters, it would be very welcome.

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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