By Akash Joshi
The equity markets ended the week on a negative note even when there were reasons to cheer. While the country s largest corporate entity Reliance Industries (RELIANCE.NS : 1045.95 -17.8) announced a bonus issue after 12 years, Infosys (INFOSYS.BO : 2328.3 -58.55), the second largest IT firm, guided better earnings. So when with such good news around, why would the markets be suspicious? This is a question that boggles both investors and traders at the moment. And there are different views coming across at the same time, hence the market, unless there is a disruption in the current inflows trend, is expected to remain undecided in the next couple of weeks. At least, till the results picture becomes clear. While delivering a lecture at an event, Rakesh Jhunjhunwala said the current big bull and the investor are the most watched out for in India. If you see the formation of the indices, all the stocks are going up. (There are) minor corrections at every point. You cannot have this kind of a rise...(a) peak without burst. I think the burst will come within one or two months. In the same breath he quickly covered his position by saying, I have a right to be wrong and I may change my opinion very fast. This clearly indicates the level of uncertainty that the markets are in at the moment. They are at the crossroads at the moment waiting for some signal to emerge before a direction is decisively taken. The first level of momentum, after the March 2009 fall, has been achieved, indices have doubled. Amongst the differing views, many would reckon that in the intermediate, which is in the next three to four months, the markets would tend to correct. Despite that the outlook on earnings is set to remain strong. Earnings and valuations Analysts at Bank of America Merrill Lynch reckon, We believe the earnings season for quarter ended September 30, 2009 will be good. They believe that, after excluding metal companies from those listed on the Sensex (^BSESN : 16632.01 -222.92), the operational profit or EBIDTA is set to grow by around 20% and net profit growth 9.4%. They also say the earnings growth will surprise estimates and that there could be some upgrades. In the same light the report mentions, Current stock prices seem to factor in lot of the positive surprises with valuations at 18 times one-year forward. We won t be surprised if stocks sell on good news. This is the cautious view many institutions are taking. Anish Jhaveri, CEO of Antique, a Mumbai-based investment banking and stock broking firm, believes that the earnings growth will plateau again after recording growth this quarter. How can we have a situation where we have to wait for a month to take a car delivery? This technically should not happen. Jhaveri also is of the opinion that the rates are set to rise as liquidity, which is abundant in the market, will dry up in the busy season once the government resumes its borrowing programme. Going ahead on this view, analysts at Kotak (KOTAKBANK.NS : 763.7 -20.5) Institutional Equities are taking a stronger view on the situation. They recommend their clients to hide and not to seek . We recommend investors position their portfolios for a likely correction in the Indian market. Stretched valuations across most large-cap stocks leave us with limited investment ideas. Thus, we suggest that investors increase their positions in cash and defensive stocks, says the report. They add that there is a limited scope for earnings upgrades, Given that we are already meaningfully ahead of consensus and see maximum downside risks to our earnings estimates for the cement, energy and telecom sectors. With this view KIE has reduced weights and changed their model portfolio to reflect their concerns. They are also concerned about full-to-rich valuations after the recent run-up in their stock price, especially technology. They have allocated the relocation in the portfolio to keep cast (around 10%) for the first time and defensive stocks like GAIL (GAIL.NS : 412.9 +3.7), NTPC and Tata Power. The reasoning is based on the market s rich valuations and find limited stocks or sectors to hidein the event of a market correction. A relentless flow of funds into the Indian market has led to a significant re-rating of most sectors with only moderate improvements in the operating environment and earnings; in some cases, the operating environment has remained the same (refining) or appears set to weaken (cement, chemicals and telecom), concludes the report. Analysts at Morgan Stanley seem to have a more sanguine view as they reckon this will be a comeback for the industrials or the manufacturing sector. Ridham Deai and Sheela Rathi believe, We believe that the trough in corporate capex may be behind us. We see both supply and demand-side factors supporting a recovery in private capex in the coming 12-24 months. This is probably still not priced into industrial stocks, and hence we expect industrials to continue their out-performance versus the market in the coming months. As an interesting observation, they look at the corporate debt issuances in the previous months as an indicator that capacity expansion will be real and will thereby impact earnings growth. They reason that corporate balance sheets remain in the pink of health, save for a few companies. Some of these companies that have been under stress have recapitalised balance sheets. The key metric to track is the increase in debt issuances, which suggests that companies may be gearing up for increased spending, the report adds. And while equity issuances have picked up in the previous months, so have debt issuances, especially from companies like LandT. This very strongly indicates that these funds will be put to use fast. Collective corporate psychology is that equity is free, given that equity capital does not entail a fixed cash flow obligation. While the issuance of equity is closely linked to the cost of equity (i.e., valuations), companies rarely issue debt just because it is cheap. The cash costs associated with debt in the form of interest payments and principal repayments mean that companies do not usually issue debt unless it is being put to use for cash flow generation (either capex or working capital). Fund flow factor As the plot thickens, there are divergent views on the fund flow factor as well. Navin Suri, CEO of ING Investment Managers, while speaking with FE earlier had mentioned that the risk appetite for overseas investors has increased and also that the savings rate in the US, especially after the recessionary fear has grown from 1% to around 7 to8%, which means that funds worth around $900 billion would need to be invested. And, therefore, India would definitely attract consistent inflows. At the same time there is a school of thought that the flow would subside for a while as several hedge funds would be opening up the window for redemptions. And, when this happens, there is a tendency to book profits and move out of markets. These redemption windows are generally open in November and December to enable investors to record gains on their books before the calender year ends. Many investors would be much to willing to book those gains after a year of bad performance, says a senior executive with a leading overseas investor. However, they will also come back when things are more clearer and would want to take a fresh view of the Indian market. This could be the time to cash in. Hence, being cautious and keeping cash at hand to pick up bargains is being advised by many portfolio investors. In fact, Jhaveri mentions the need to buy beta stocks, or those that fall faster when the market tanks and also rise faster when it does. He also mentions that the concept of growth has now changed and many FMCG companies could well become high growth stocks as the demand from rural India kicks in. Sectors like telecom are now saturated, he reckons. So as the markets brace themselves for uncertainty in the coming days, the overall conclusion would be to stay put and watch developments as they unfold. Any corrections in the markets would be a good time for picking up stocks.
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) announced a bonus issue after 12 years, Infosys (
), NTPC and Tata Power. The reasoning is based on the market s rich valuations and find limited stocks or sectors to hidein the event of a market correction. A relentless flow of funds into the Indian market has led to a significant re-rating of most sectors with only moderate improvements in the operating environment and earnings; in some cases, the operating environment has remained the same (refining) or appears set to weaken (cement, chemicals and telecom), concludes the report. Analysts at Morgan Stanley seem to have a more sanguine view as they reckon this will be a comeback for the industrials or the manufacturing sector. Ridham Deai and Sheela Rathi believe, We believe that the trough in corporate capex may be behind us. We see both supply and demand-side factors supporting a recovery in private capex in the coming 12-24 months. This is probably still not priced into industrial stocks, and hence we expect industrials to continue their out-performance versus the market in the coming months. As an interesting observation, they look at the corporate debt issuances in the previous months as an indicator that capacity expansion will be real and will thereby impact earnings growth. They reason that corporate balance sheets remain in the pink of health, save for a few companies. Some of these companies that have been under stress have recapitalised balance sheets. The key metric to track is the increase in debt issuances, which suggests that companies may be gearing up for increased spending, the report adds. And while equity issuances have picked up in the previous months, so have debt issuances, especially from companies like LandT. This very strongly indicates that these funds will be put to use fast. Collective corporate psychology is that equity is free, given that equity capital does not entail a fixed cash flow obligation. While the issuance of equity is closely linked to the cost of equity (i.e., valuations), companies rarely issue debt just because it is cheap. The cash costs associated with debt in the form of interest payments and principal repayments mean that companies do not usually issue debt unless it is being put to use for cash flow generation (either capex or working capital). Fund flow factor As the plot thickens, there are divergent views on the fund flow factor as well. Navin Suri, CEO of ING Investment Managers, while speaking with FE earlier had mentioned that the risk appetite for overseas investors has increased and also that the savings rate in the US, especially after the recessionary fear has grown from 1% to around 7 to8%, which means that funds worth around $900 billion would need to be invested. And, therefore, India would definitely attract consistent inflows. At the same time there is a school of thought that the flow would subside for a while as several hedge funds would be opening up the window for redemptions. And, when this happens, there is a tendency to book profits and move out of markets. These redemption windows are generally open in November and December to enable investors to record gains on their books before the calender year ends. Many investors would be much to willing to book those gains after a year of bad performance, says a senior executive with a leading overseas investor. However, they will also come back when things are more clearer and would want to take a fresh view of the Indian market. This could be the time to cash in. Hence, being cautious and keeping cash at hand to pick up bargains is being advised by many portfolio investors. In fact, Jhaveri mentions the need to buy beta stocks, or those that fall faster when the market tanks and also rise faster when it does. He also mentions that the concept of growth has now changed and many FMCG companies could well become high growth stocks as the demand from rural India kicks in. Sectors like telecom are now saturated, he reckons. So as the markets brace themselves for uncertainty in the coming days, the overall conclusion would be to stay put and watch developments as they unfold. Any corrections in the markets would be a good time for picking up stocks.
