Just when you think things couldn't get any worse, they do. The dotcom crash, the IT squeeze, and the global slowdown all seemed to be the worst that could happen to your company when they did. But then came the great telecom meltdown, the accounting scandals in the US, the global stock market paranoia, and now the spectre of a US-Iraq war. Like they say, it never rains, it pours.

On Dalal Street, it was a record (half) year too-of loss in market capitalisation. Consider this: of the largest 500 companies, a good 115 actually saw their value fall in the first half of this fiscal, compared to the same period last year. That's Rs 42,810 crore in market cap gone before you could say 'sell'. Yet, in many ways, the investor may have just gotten a lot smarter. Reason? Among the top most valuable companies, the losses in market cap were relative, meaning that while they all lost, they managed to more or less keep their places. Thus, you have the top five-HLL, Wipro, Reliance, Infosys, and ITC-losing more than Rs 13,000 crore in cumulative market cap, but none the worse for it in terms of sheer ranking.

Stocks that were high on the pecking list, but seemed to be losing their grip, were mercilessly pushed off their precious perch. HCL Technologies, Zee Telefilms, and Himachal Futuristic Communications Ltd (HFCL) (7, 8, and 10, respectively, on the 2001 BT 500) don't figure among the top 10 this year. The three new usurpers: Ranbaxy Laboratories, Housing Development Finance Corporation, and Dr Reddy's Laboratories. (However, the biggest surprise should have been ONGC. Had the oil giant not been a state-owned company, it would have been the most valuable company on the BT 500.) This spotlights the other part of our argument: that for companies that seem committed to growth and profits, there's still plenty of good valuation around.

Searching For Trends

But we would recommend that you don't look for trends. For, in the past months, there has been none. Sure, anything to do with technology and telecom lost its sheen. But here again, the investor has been selective on his bets. Take telecom, for instance. While HFCL sank like a stone, the newly-listed Bharti Tele-Ventures sauntered in at a cool #13, with an average first-half market cap of Rs 6,219 crore. In the auto industry, too, two-wheeler stocks rode high on the back of strong motorcycle sales. Hero Honda saw its value more than double to Rs 6,255.69 crore in the first half of 2002-03. Bajaj Auto's soared too from Rs 2,541.35 crore to Rs 4,794.34 crore. The dark horse, of course, was TVS Motor, whose market cap almost quintupled to Rs 1,015 crore. Similarly, while the cement industry's cup of woes continued to brim over, Gujarat Ambuja, Grasim, and acc made smart gains.

The overall trend, though, has undoubtedly been bearish. That's best demonstrated by the FMCG sector, where almost all the big companies lost. HLL, P&G, Colgate-Palmolive, GSK Consumer, Dabur, Britannia... you name it. A quick back of the envelope calculation shows that between them, these companies lost a staggering Rs 5,950 crore in value in the first half of this fiscal, compared to the corresponding period in the previous year.

If one were to step back a bit to, say, the euphoric days of 2000 and see what's happening in the stockmarket-especially to the information technology stocks-the massacre looks all the more gory. Wipro, Infosys, and Satyam are at half their values, and HCL Tech is at almost a third. Says Devesh Kumar, Head of Equities, i-Sec: "When globally there is negative sentiment, India is not doing enough to change the news flow emanating from within the country."

Yearning For A Driver

The general uncertainty has meant that there are no clear trends in the market. Hopes of a recovery are periodically punctuated by fears of another downturn. Notes Sandeep Bhatia, Executive Director, UBS Warburg Securities: "The market is searching for a driver, which unfortunately is not holding up for a long enough period of time." Indeed. Take the case of PSU disinvestment. Just when the sell-offs seemed to have gathered steam, sundry forces from within and outside the government managed to derail it. No doubt, the Prime Minister has come its rescue, but there's no guarantee disinvestment will actually happen. In such a situation, the market seems to be jumping from sector to sector. Even globally, there is not a single sector that is positively up.

"In the last 12 months, there has been nothing unique-no emergence of new technology, no proprietary research. So the lack of any sectoral trend is not surprising" Devesh Kumar Head of Equities/I-SEC

This is unlike the past two-to-three years, when there were clear trends. New economy was fashionable, and so was media and biotech. Then, the industrials, or the old economy stocks, were clearly going out of fashion, and anything that sounded remotely IT was hot. Agrees i-Sec's Kumar: "In the last 12 months there has been nothing unique-no emergence of new technology, no proprietary research. So the lack of any sectoral trend is not surprising." There is uncertainty on growth, uncertainty on competitiveness and this has weighed heavily on sectors across the board.

That's not the only thing confounding seasoned investors. According to U.R. Bhat, Director, J.P. Morgan, for the first time in India, there is a peculiar situation where the earnings yield of BSE Sensex stocks at 10 per cent is higher than the yield on 10-year gilts which is at 7 per cent. "What this means," explains Bhat, "is that the market is not confident of earnings growing further, and in fact it expects the earnings from stocks to depreciate." In the US, there was a period of six-to-seven years after the depression (1929-35) when both dividend yield and earnings yield were higher than the interest rates or 10-year treasury yield. Apparently, when there is a huge correction in the market, investors' risk appetite depreciates and despite attractive valuations, they stay away.

"The market is not confident of earnings growing further, and in fact, it expects the earnings from stocks to depreciate" U.R. Bhat, Director/J.P. Morgan

This could also be the stock market's equivalent of the doldrums. Take a look at the Sensex. The bellwether index has been trading in a narrow band between 2,950 and 3,400 points. It's as if it were waiting for a signal from somewhere-anywhere-before casting off its restraints. Says Alok Vajpeyi, Chief Operating Officer, DSP Merrill Lynch Investment Managers: "It's reflective of what is happening globally as well. In the next six to eight months, we expect liquidity flows to increase significantly, chasing high growth economies, among which India will be a major destination." If that does happen, the increase in valuations could be across the board, but the bigger gainers will be the large-cap stocks.

As of now, says Bhat of J.P. Morgan, there is nothing unique that could fire the imagination of the market. What could be a trigger is the outsourcing sector that could create some momentum. True, there are just a handful of listed companies in this sector, but some of them could spring a surprise. Then, there is the financial sector. Despite the Indian consumer's historic aversion to debt, there's a growing breed of consumers that is credit happy. An increase in their numbers will not only lead to a revival in the financial services sector, but also in that of consumer durables and auto.

Our choice of features (they follow) on the BT 500 companies was determined by a simple measure: there must be an interesting story to tell. Therefore, we picked up Ranbaxy to examine its transformation into India's first truly transnational company. Bharti Tele-Ventures makes a good case study of one industry where privatisation has more than succeeded. ONGC could be the story of other top public sector units, provided they manage to unlock their values. And Moschip, a low-profile Hyderabad-based semiconductor company, may be an underdog today, but we think it could be a winner tomorrow-provided its plans pan out.

However, given Dalal Street's current misgivings, it may be a while before equities regain their sheen. But remember: a good time to buy stocks is when nobody else is buying.