News: India Inc’s flying, the market bull is on steroids

(DNA 21/01/2007) Mumbai - There are some very encouraging corporate results for the quarter ended December 2006. led by the largest private sector company, Reliance Industries, which stunned analysts with unexpectedly a refined performance (net profit for Q3 up 57% to Rs 2,799 crores), thanks to an incredibly healthy $11. 3/barrel gross refining margin.

Technology firms have shown topline growths around 40% and bottomlines have improved between 41% for Wipro to a slurpy 58% for HCL Technologies.

Ranbaxy showed a 169% jump in PAT to Rs 186 crore, while metals major Sterlite increased its PAT by 227%.

The market moved up in anticipation of good results, with the BSE Sensex hitting an all-time high of 14325 and the NSE Nifty an all-time high of 4140 before profit-booking brought them down to 14182 (up 0.9%) and 4090 (up 0.9%), respectively.

Investors may well ask quo vadis? to Dalal Street.

The longer term trend is up. At some point, there may be a downward correction which would provide a buying opportunity. This could be triggered, perhaps, by the Reserve Bank of India’s monetary policy review on January 31, and which may, perhaps, tighten money to curb rising inflation. More worryingly, it may be triggered if, with approaching elections, politicians succumb to votebank politics.

There is evidence that this is already happening. The government has asked the Indian Bank Association to suggest a quota for loans for minorities. Now a minority cannot be defined regionally, since a person who is in a majority in his own state would be a minority in another. This suggests that this is only based on religion. This is lamentable and an attempt to continue with the British policy of divide and rule. Affirmative action is fine, but on economic considerations. When it is sought to be used on the basis of either religion or caste, it is motivated by the basest of political motives and perpetuates differences.

Despite a booming economy leading to buoyancy in tax collection, the government continues to be short on funds because its propensity to spend far exceeds its ability to earn. This leads to contorted money-raising, or shifting of a part of the expenses away from the budget. A few years ago, in order to boost the spend on education, the government had floated schemes such as the Sarva Shikshan Abhiyan (universal education) and mid-day meal scheme. This burden is now sought to be shifted to the 2% education cess account, so that the fiscal numbers do not seem to have slipped.

The booming economy is helping the government raise resources. The Railways have sold a smallish, well-located plot for Rs 900 crore in Mumbai. Not only does this free up resources, it can also improve productivity. Productivity of both labour (in heavily overmanned government departments and companies) and capital is criminally low in the public sector. Any such transfer to a more efficient use in the private sector would, in itself, drive up growth. The potential for economic gain by the government simply stopping wastage and behaving foolishly is unbelievable and is the actual India story.

MTNL is also likely to similarly gain from unlocking of value in unutilised land, which has appreciated considerably. The government plans to sell more in public sector undertakings such as Power Grid Corporation.

An example of the type of foolish behaviour by government is in the decision to treat spectrum as a scarce resource and to auction it for 3G applications. Instead, spectrum should be treated like the ‘commons’ and priced attractively to encourage its widespread usage.

Another foolish behaviour is to treat all PSUs, even those with minority shareholders, as their personal fiefdoms, and issue diktats that circumscribe management.

Buying on any dip that occurs would be recommended. The Indian bull is on steroids and can only be halted by an Indian politician behaving like an ostrich with peptic ulcers.

Buy on dips

The longer term trend is up. At some point, there may be a downward correction which would provide a buying opportunity

This could be triggered, perhaps, by the RBI’s monetary policy review on January 31

Keep an eye on the impact of votebank politics as polls near