Rakesh Jhunjhunwala, arguably the biggest Indian bull trotting down Dalal Street, is a bit like Vitalstatistix, the village chief of the tribe of Gauls in the legendary Asterix and Obelix tales: Always full of beans, plucky (and both are a bit quick-tempered too!). Jhunjhunwala for his part has been diving into Indian equity with the same gusto that Vitalstatistix wades through the Romans in their inevitable battles. For all his bravado, though, Vitalstatistix has a lurking fear. The Gaul chief is afraid the sky may fall on his head tomorrow. D-street's big bull isn't as vocal-he's a bull after all, and he'd rather talk about price-earnings expansions, ambitious Sensex targets and sustainability in corporate earnings.

Yet, in a recent slide-show presentation put together earlier in the year by the country's most popular value-investor, which seeks to make a case for big-time, long-term investment in Indian markets, Jhunjhunwala spares a slide (just one out of 74) for what he terms "potential party spoilers". Unlike Vitalstatistix's solitary anxiety, Indian investors it would seem have plenty of them. Jhunjhunwala classifies them into three categories: Near-term anxieties, which include elections, crude oil prices and the monsoons. Then there are the "omnipresent" fears, which include the uncertainty in the global economy, oversupply of IPO paper and the falling us dollar. Finally, under the long-term sub-head, Jhunjhunwala has rising inflation and interest rates, as well as Indo-Pak tensions and terrorism as possible poopers of the equities party. In the current context, unarguably the most relevant of the worries powerpointed by Jhunjhunwala is the direction in which crude oil prices are headed. Rising inflation is of course a corollary to that.

Of course, like old warrior Vitalstatistix, Big Bull Jhunjhunwala too might like to believe that "tomorrow never comes". But then, as history painfully reminds us time and again, tomorrow always comes. After all, disaster, or even disappointment, doesn't have the habit of tapping you and your shoulder before announcing: "I am coming." Market crashes by nature are sudden and unexpected (else they wouldn't be called crashes, right?). The skies may have not yet fallen on the 28-storey P.J. Towers, headquarters of the recently corporatised Bombay stock exchange-and they probably won't-but plenty of bull runs of the past have almost overnight been abruptly halted, reversed and erased, along with crores of small investor savings. There's little doubt, though, that the ongoing bull is fundamentally sound, that the Indian economy is growing much faster than the global average, that the country's purchasing power parity is right up there, that business confidence is upbeat, that valuations may not yet be stretched, that 15-20 per cent earnings growth can still be sustained... all that and much more.

Bulls are in the business to be bullish, and expecting them to talk down the current market rally-or to expect real estate brokers to say there will be an oversupply situation soon-is expecting them to commit professional hara-kiri. It may be difficult to scratch beyond the pretty picture that exists today, simply because this rosy scenario isn't superficial. Yet, somewhere below there-not too deep, either-exist some real concerns. When resurrecting them, one stands the risk of being labelled alarmist, pessimistic or just plain foolish. But when oil prices just keep inching upwards-close to the $70 (Rs 3,080) mark per barrel last fortnight, up from $42 (Rs 1,848) last August, and possibly over $100 (Rs 4,400) some time soon-you have to expect the domestic stock markets to react some time. After all, transportation and production costs will suffer, which means virtually every company and every sector will be affected.

Crude oil prices is just one of the major external concerns. Closer home, the earnings season hasn't been as good for certain key sectors. Will that put valuations under pressure? If so, will foreign investors zero in on markets with more compelling valuations? If markets correct themselves in a big way, what happens to real estate demand? Can it keep up with the huge supply expected to be unleashed? What happens to the Rs 75,000 crore of IPO paper that's expected to hit the markets? Can it all be absorbed? And, yes, will Mr Retail Investor become a fall guy yet again, entering at near-peak levels, only to be caught in the midst of a 2,000-2,500 point correction?

We attempt to answer all these questions in the following pages. We aren't predicting disaster-just trying to steer clear off it.

WHAT IF #1: CRUDE OIL PRICES CONTINUE TO SOAR
The Indian economy can't insulate itself from an oil shock for ever.

In March this year, Goldman Sachs shocked the world with a scary report. The investment bank forecast that the oil prices could go as high as $105 (Rs 4,620) a barrel by 2007, and the average price of oil in 2005 would not be less than $50 (Rs 2,200), up from $41 (Rs 1,804) in 2004. "We believe oil markets may have entered the early stages of what we have referred to as a super spike period," said Arjun N. Murti, an analyst with Goldman Sachs and one of the authors of the report. It may sound unbelievable-several energy analysts disputed Goldman's views-but the fact that the high priest of the Wall Street analyst community decided to stick its neck out with this uneasy prediction itself can send chills down your spines. Anyway, there has been no good news ever since. Oil prices are currently ruling at $65 (Rs 2,860) a barrel, continuing with its 18-month upward march.

There is a sliver of good news, however: Till now, the Indian economy has successfully resisted the impact of international oil prices, thanks to the restructuring of agricultural and industrial economies, buoyant forex reserves and growing it exports. So despite a continuous spike in oil prices in the last two years, the economy grew by a healthy 6.9 per cent last year. Even the current inflation of 3.35 per cent is much lower than what it was during the previous two shocks-25.2 per cent in 1973 and 18.2 per cent in 1979.

But the bad news is India will not be able to absorb a persistent oil shock. And the tell-tale signs of such a phenomenon are beginning to show. India's crude oil import bill is expected to go up by 47.5 percent to Rs 1,72,326 crore this fiscal from Rs 1,16,806 crore last year. The basket of crude Indian refiners buy has sharply risen to $51.08 (Rs 2,247.52) a barrel in April-July this year from an average of $39.22 (Rs 1,725.68) in 2004-05. In August, it had even peaked to $58.83 (Rs 2,588.52) a barrel and, according to Goldman Sachs, the average price of crude in 2006 is expected to be $68 (Rs 2,992) a barrel.

For now, the government has been reining in domestic petroleum prices artificially. Domestic petroleum prices have increased only by 20 per cent, while the global crude prices went up by 45-50 per cent. Besides, prices of kerosene have remained unchanged since March 2002 and of domestic LPG since November 2004. The effect of all this has been telling on Indian oil companies like Indian Oil, Bharat Petroleum and Hindustan Petroleum, which have been absorbing the impact. "The most disastrous impact of spiralling oil prices is on the domestic oil companies," says Shubhomoy Mukherjee, Head (Oil and Gas Rating), ICRA.

A recent Union Cabinet note recommending a hike in domestic fuel prices-petrol by Rs 1.50 to Rs 47.43 per litre and diesel by Rs 2.50 to Rs 38.4 per litre-is still awaiting the nod. But a hike in fuel prices will have a spiralling effect on monthly household budgets, with vegetables and other daily needs becoming costlier. The prices of all products and services-from LPG to medicines to plastics to air travel-are bound to go up. The economy has remained resilient till now, but if the oil prices rule at $65-70 a (Rs 2,860-3,080) barrel, the damage could be real.

-Sahad P.V.

WHAT IF #2: THE FIIS SLOW IT DOWN
They're pumping in top dollar because they have few other options. But global markets could become attractive once again.

As any punter in the nooks and crannies of Dalal Street will tell you, the current bull run is liquidity-driven. That liquidity of course is pretty much accounted for by foreign institutional investors (FIIs, all 759 of them at last count), which had collectively invested $7.3 billion (Rs 32,120 crore) by mid-August in 2005 in Indian markets. Domestic liquidity is of course minimal. Retail investors-despite the million exhortations of equity pundits-have largely stayed on the sidelines, and mutual funds haven't pitched in big-time, either. In the April-June period for instance, net resource mobilization by funds declined 32.5 per cent to Rs 14,723 crore over the corresponding period of the previous year. Clearly despite all the hype around equities, it's unlikely that mutual funds' net resource mobilisation in 2005-06 will touch 2003-04 levels of Rs 45,000 crore-a year in which the Sensex didn't venture beyond 6,250.

So, other than a local operator here and there, it's safe to assume that it's the FIIs who are fuelling the great Indian bull run. In August, however, a few strange things have happened, which suggest that the foreign pinstriped brigade may just be easing up, although the Sensex hasn't quite been doing so! On 8 August for instance the benchmark index fell 148 points-despite the FIIs being net buyers to the tune of Rs 420 crore. Conversely two days later the foreign moneybags sold a little of Rs 100 crore of shares at the net level, yet the Sensex shot up Rs 134 points. Is this the first sign of a slowdown in FII flows? And if the FIIs aren't buying, have dubious speculators got into the act?

Last fortnight, the theory of decreasing FII interest-albeit, temporarily-gained ground when a technical analyst with CLSA talked about, on a business channel, a 15-20 per cent correction for the Sensex in this phase of the bull run. He reckoned that the indices would get going once again only by 2006. Ashok Kumar, CEO, Lotus Knowlwealth, an advisory firm, does not rule out the possibility of a slowdown in fresh flows. "To expect only inflows would be unrealistic. It is possible that the money from the FIIs has come into by sheer default."

"Like any other investor, they too will exit when they make good returns," explains Paresh Khandwalla, Director, Khandwalla Securities, who is pretty sure though they will be back soon. His reasoning is simple: Barring India, there aren't too many markets for the FIIs to put their money in. Japan and the us aren't attractive for investors-which explains why it's been Japanese money that fuelled the last 1,000 point gain in the Sensex-and China and India are easily the hottest investment destinations as of today. "The interest in India is now to the extent that it is not about India and China. In fact, it is about India and China and those who missed the China story do not want to miss the India story," maintains HDFC Bank's Head of Equities and market analyst, Abhay Aima.

One worry is that some 30-35 per cent of the foreign money in Indian markets is from hedge funds, which by nature is "hot" moolah. Brokers also acknowledge that there is a fair bit-though not significant-of domestic money being rerouted as FII money and entering a section of mid and small-cap stocks. Yet, the genuine FIIs themselves might be a bit jittery themselves, particularly against the backdrop of rising crude oil prices. "Obviously, clarity is required on which way the oil prices are headed" says Amit Rathi, Director, Anand Rathi Securities. Clearly, even if the FIIs do cool off temporarily, that won't be a bad thing as a correction is badly needed on the Indian markets. The worry, though, is two-fold: Will the local speculators rule the roost when the FIIs are away? And will the FIIs come back with a similar big bang, or will they find other fish to fry as well as Indian stocks become more expensive than their counterparts in other emerging markets?

-Krishna Gopalan

WHAT IF #3: EARNINGS GROWTH SLOWS DOWN
Valuations, though reasonable today, may go out of whack.

One of the most convincing justifications for the ongoing market rally is the meaty earnings that Indian companies have been dishing out quarter after quarter. These profits, coupled with increased efficiencies, lower leverage and better governance have made a case for the re-rating of Indian equity. However, if the earnings story falters, valuations will begin to look silly.

In the April-June quarter just gone by, some worrying signals do emerge, although there's little need to press the panic button. Sectors like automotive, engineering, metals and petrochemicals witnessed a softening in earnings in comparison with the previous quarter (January-March), perhaps because peak cycles seem to have passed in many of these industries. After several consecutive quarters of non-stop growth, almost every major company in these sectors saw an earnings slip. According to data from Enam Research, autos for instance witnessed a 13 per cent dip in sales and a 7 per cent dip in net profits quarter on quarter (QoQ), with Ashok Leyland, Tata Motors and TVS Motors leading the dip. In engineering, the QoQ slip-up in earnings is 70 per cent, and in petrochemicals it is 37 per cent, thanks in no small measure to the flare-up in crude prices.

"This is a market that is being driven almost completely by sentiment," says Parag Parikh, MD, Parag Parikh Financial Advisory Services. "The problem is that there is a lot of money chasing too few key scrips," he adds. "People are not looking at the results, which are already reflected in the price of several scrips." But is it all doom and gloom? Another analyst points out that as far as year-on-year growth goes, most companies have shown impressive results. But then, as Parikh asks: "What will happen if oil hits $80 (Rs 3,520) in a few months?" Shudder, shudder.

-Kushan Mitra

WHAT IF #4: THE LEFT CONTINUES TO PLAY SPOILSPORT
Reforms will be delayed, even reversed.

Political uncertainty was always a given for the United Progressive Alliance (UPA). But when one of its key allies, the Left parties, begins throwing spanners in a host of initiatives, from privatisation to reforms in the banking, pension and labour sectors, to airport modernisation, the P in the UPA contraction sticks out like a big joke. Last fortnight, rumours did the rounds in the capital that Manmohan Singh was becoming increasingly disillusioned and despondent about his inability to push through economic reforms, and that this could even persuade him to quit as Prime Minister. Luckily, these stayed just rumours. But there's no denying that the communists have already taken a toll of the country's plans to push through reforms.

On August 16, the government formally called off its plans to privatise 13 profit-making public sector undertakings (PSUs) through strategic sale of equity. Minister of State for Finance, S.S. Palanimanickam, stated in a written reply to Rajya Sabha: "In keeping with the National Common Minimum Programme (NCMP) guidelines, it has been decided to call off the process of disinvestment through strategic sale of 13 profit-making PSUs."

What is worse is privatisation-whether through a strategic sale or a public float-is now unlikely to remain a part of the government's agenda. The UPA's decision to temporarily halt the disinvestment of Bharat Heavy Electricals Ltd (BHEL) is a case in point. In the case of BHEL, it was a public float and not a strategic sale that was being considered. It was not privatisation but a mere disinvestment of a 10 per cent stake (without losing majority control) that was proposed. But the Left parties-they have 64 mps in the 543-member Lok Sabha-obviously think such a move is sacrilegious.

The Left will continue to extract its pound of flesh since the UPA has no choice but to depend on its support to remain in power. With elections due in the Marxist bastions of West Bengal and Kerala next year, the future isn't exactly rosy.

-Sahad P.V.

WHAT IF #5: THERE'S AN OVERSUPPLY OF IPOS
Coupled with a slowdown in foreign inflows, this could depress prices across the board.

Last fortnight, when the initial public offering (IPO) of ht Media, publishers of the national daily Hindustan Times, was oversubscribed 16 times-despite sundry analysts expressing their concern about its stretched valuation (a price-earnings ratio of 44 on 2005 earnings at the upper end of the price band of Rs 530), the promoters would have had enough reason to party. So would the honchos of companies like Sasken Communications and Vivimed Labs, also arguably aggressively-priced issues, and also hugely over-subscribed. The question, then, on the lips of one section of market watchers: With the markets at the levels at which they are-the Sensex is nearing 8,000 and a correction is inevitable-how much of an upside exists for investors who've pumped their moolah into these IPOs? Not much, for sure.

The good news may appear that there's an enormous appetite for IPOs, which is reflected in the oversubscription figures (Sasken for instance was oversubscribed 78 times). But what isn't quite so apparent is that the success of the more recent issues is probably at the cost of earlier rounds of IPOs, which showed heady appreciation over their issue prices, only to retreat quietly as much of that same money perhaps begins chasing newer issues. Examples: Consider Nectar Lifesciences' June IPO, which had an issue price of Rs 240. The stock hit a high of Rs 303 in a month, and now quotes in the sober Rs 260 levels. Or consider Jet Airways. Issue price: Rs 1,100. All time high after that: Rs 1,379. Last fortnight? Rs 1,170. It gets worse for lesser IPOs.

So even as July IPOs like Vivimed and IDFC show 200 per cent and 100 per cent appreciation over their issue price, respectively, you have to wonder: What will be their fate once a huge number of public issues-many of them with plans to raise thousands of crores-hit the market? Here's some perspective: In 2005, up to mid-August, some Rs 12,540 crore worth of public offerings had hit the market. If you think that's huge, according to Prithvi Haldea's Prime Database, a jaw-dropping Rs 74,000 crore of issues are waiting to storm D-Street. Inevitably, there will be muckloads of smaller companies hitching onto this bandwagon. The average size of public issues in April-June 2005 was just Rs 155 crore. You can't assume that these issues are of dubious quality, but the chances of less fundamentally sound companies raising money are increasing. The paradox is that if mega-issues storm the market-perhaps at a time when foreign investors see more lucrative returns elsewhere-there might not be enough takers.

-Brian Carvalho

WHAT IF #6: THE SCAMSTERS ARE BACK
They may or not be around, but retail investors should be ultra-cautious at these levels.

If the gurus on your favourite business channel are chanting the phrase "retail investor" in every other sentence, it's with good reason: They're probably hoping that the Joes and Janes come in to fill the breach just in case Mr FII flies by the fortnight. There's little doubt that the country is decidedly underweight on equities, with just 1.5 per cent of public wealth invested in equities (as of 2004). That has to, and will no doubt, increase, but the advice for the small investor is clear-cut: Please don't try to correct that under-weightage at these levels, when the Sensex has breathlessly nosed towards the 8,000 mark, and appears visibly to be out of breath.

Historically, the retail investor has this suicidal habit of joining a bull run when pretty much 70-80 per cent of the rally is done. One phase of the current rally may well be nearing its end right now, and a 15-20 per cent correction is on the cards. Any retail investor entering now-enticed by heady projections for the Sensex-such as 16,000 by none other than a Sebi official!-will burn his fingers, at least in the shorter term. "A retail investor must have a 24-36 month timeframe at this time. If he is looking to make a quick buck, it is better for him to stay away," says Amit Rathi, Director, Anand Rathi Securities.

Rathi's point is that although there will be volatility in prices in the near term, the long term bullish trend is very much on. "This rally is not a bubble," states HDFC Bank's Head of Equities and market analyst, Abhay Aima. However, he does caution that "Overall, crude oil prices coupled with the fact that there is still an issue of over-valuation in some cases are concerns." Perhaps Ashok Kumar of Lotus Knowlwealth sums it up best when he says: "If an investor has not invested to date in this rally, he would do well to sit on the sidelines." Let's hope there's somebody listening.

-Krishna Gopalan

WHAT IF #7: THERE'S A LAND GLUT
There might not be enough demand to take in supply.

The equation is simple as well as mind-boggling: 32 textile mills = 12.5 million square feet = Rs 10,000 crore. If the development of Mumbai's private mills does get the green signal, the city would be in for a massive bout of urbanisation and real estate creation. The danger: If all this supply enters the market at one go, demand may not keep pace along with supply, and prices will crash. But few developers and investors are worrying about that distant prospect. After all, prices-across India-are shooting through the roof: In Gurgaon, high-rises are booked out months before construction starts and in Bangalore the new airport might be three years away, but that hasn't stopped land prices on the Devanhalli road from trebling or quadrupling in the last 18-24 months. Can the momentum be maintained? "True, several developers have highly leveraged debt for the development, but on the other hand demand still outstrips supply, and almost all new developments get sold out in no time", says Anuj Puri of Chesterton Meghraj, a Mumbai based real-estate consultancy.

It appears like boom times, but that's exactly how it was a decade ago. A couple of years down the line, by 1997-98, prices had tanked, and didn't stabilise again till 2000. Can a similar bust-up happen? There may be some degree of speculation under way. "Look at the retail space that has come up on the Mehrauli-Gurgaon Road," suggests Anshuman Magazine, MD, Cushman & Wakefield India. "This is a case of supply chasing demand. There is a problem of oversupply..." Another potential dampener is the total lack of infrastructure, right from drains to roads. Perhaps if the infrastructure came first, and then the development-as in China-the current real estate boom would appear even more convincing.

-Kushan Mitra