Sometime
in the second week of May, Vijay Holkar (not his real name) made
one of the biggest bloopers of his life: He invested all of Rs
10 lakh in a basket of blue-chip stocks like Hindalco, Reliance
Energy, Ranbaxy Labs and Hero Honda. His blunder didn't lie in
the stocks he picked; rather, it was the timing that was awful.
The markets were at a lifetime high in the 12,600 range, and Holkar
was clearly sold on the long-term India story. Unfortunately,
global liquidity conditions tightened as interest rates shot up,
foreign institutional investors (FIIs) pressed the sell trigger,
and the benchmark Sensex slipped into a free fall, crashing 30
per cent by mid-June. Holkar was horrified, as not only had his
investment shrunk in a matter of weeks, he also couldn't spot
an exit route as the fall was so sharp and so sudden. Mercifully,
after the bloodbath of June, the markets once again began their
upward journey, and by last fortnight at the time of writing,
the BSE's 30-share benchmark index was up 32 per cent. Holkar
was relieved. But not for long. Reason? When he hunkered down
to check the prices of the stocks he'd purchased, he realised
they hadn't exactly kept pace with the Sensex uptrend. Hindalco
was still almost 30 per cent off its peak price (the price at
which Holkar had entered), Reliance Energy was off 28 per cent,
and Ranbaxy 18 per cent. The Sensex may be up by a mile, but Holkar
is still very much in the red.
Is The FII Fury Finished? |
Like it or lump
it, foreign institutional investors (FIIs) continue to remain
the lifeline for Indian equities, dictating the overall market
sentiment. The fear on Dalal Street these days is that if
the US economy slows down-as it is threatening to do-will
that reduce the flow of foreign money into domestic stocks?
U.R. Bhat, Managing Director, Dalton Capital Advisors, doesn't
think so: "The robust growth and strong corporate fundamentals
will drive the flows into India. If corporates continue to
surprise the market by outperforming expectations, inflows
will remain unaffected." Umesh Kamath, Head (Equities),
Canbank Mutual Fund, feels a US slowdown may actually benefit
India. "If the US slows down, the weightage of emerging
market inflows into India will increase."
Yet, the fact is that FII flows into India are in the
slow lane, at least relative to 2004 and 2005, when inflows
totalled Rs 39,000 crore and Rs 47,182 crore, respectively.
In contrast, till August 30, the FIIs have invested just
Rs 17,400 crore in 2006-of course the Rs 9,450 crore that
was pulled out between May 12 and June 14 did a lot to dampen
that figure. Ajay Mahajan, President (Financial Markets),
YES Bank, attributes the FII outflow to expecations that
US "may take its rates up to 6 per cent, thus making
it an attractive investment destination". However,
he doesn't anticipate any further rate hikes (the last hike
was up to 5.25 per cent), which is good news for FII inflows.
Amen.
|
Back To Winning Ways
Indeed, from the outside, the scenario appears
buoyant: After crashing 30 per cent in mid-June, the Sensex would
appear to be back to its winning ways. The revival seems to have
trickled down through the market, what with the mid-cap and small-cap
indices notching up 31 per cent gains since the June free fall.
Every stock that constitutes the Sensex is up from its three-month
low, with the it pack comprising Infosys Technologies and Satyam
Computer Services registering a 40 per cent-plus appreciation
in this period. What's more, Infosys and Satyam have run-up even
higher than their mid-May prices, the period during which the
BSE index hit its all time high of 12,671.
But as Holkar will testify, the teji isn't
quite back, and there's little sign of celebration amongst the
broker, investor and punter community on Dalal Street. Sure, a
3,000 point run-up in less than three months does suggest the
glory days are back, but scratch the surface and you will discover
the fallacious nature of the current boom: One, the rise is on
the back of low volumes and turnover. Two, unlike in the December
2005-May period, when the Sensex shot up from 8,800 to 12,671
levels, the current gains aren't backed by convincing inflows
from the FII fraternity. Third, the market breadth, of which the
advance-decline ratio is one good indicator, is weak, making it
difficult to vouch for the sustainability of the rally. Fourth,
all the frontline Sensex stocks would appear to have participated
in the recovery, but a comparison with previously-registered highs
indicates that, other than just three to four stocks, the rest
are still lagging the highs they notched when the 30-share index
had skyrocketed to its lifetime high. And the final factor reinforcing
that all's not well with the ongoing boom is that the primary
market for initial public offerings (IPOs) just isn't rumbling
in tandem with the secondary market (see IPO Blues...). Shrugs
Ambareesh Baliga, Vice President, Karvy Stockbroking: "The
lack of general participation-including that of the retail investor-is
the key reason for the subdued feeling in the market. There are
many investors who are still stuck with losses made during the
fall." Agrees Andrew Holland, Head (Strategic Risk Group),
DSP Merrill Lynch: "We have not witnessed any optimism in
the market as people are still nursing their wounds following
the sharp fall."
Swift Recovery
![](grfx/86a.jpg) |
![](grfx/86b.jpg) |
"The current advance-decline
ratio indicates that the market is cautious"
Gagan Banga
Executive Director/Indiabulls |
"A further rise in the market
from here would be a cause for concern"
Vaishali Nigam Sinha
Executive VP
Daiwa Securities SMBC |
That may appear surprising considering the
swiftness with which the "recovery" has taken place:
The Sensex took just 56 sessions to rise from 8,800 to 11,700
levels. In comparison, between December 6 and April 18, when the
BSE's benchmark travelled a similar distance, it took all of 90
sessions to get there. Yet, the speed of the rise itself could
be one indicator about the unreliability of the current rally.
Low volumes and turnover figures bolster that theory. From June
15, 2006, the day the Sensex rallied from its low of 8,800, till
August 30, the Sensex stocks recorded average volumes of 1.97
crore shares. The corresponding figure during the previous boom
between December 6 and May 11 is 2.40 crore shares (traded volumes
were the highest during the crash between May and June, at 2.88
crore shares). The volumes of shares in which delivery was taken
was higher too in the earlier bull run, at 99.5 lakh shares. That
the current rally is more speculative in nature is evident from
the comparatively lower delivery volumes, of just 61.7 lakh shares
in the mid-June to end August period. The lack of trading interest
is reflected in the derivates segment too. Average turnover in
futures and options (F&O) has slipped from close to Rs 30,000
crore to Rs 22,220 crore.
Perhaps the best indicator of the dubious
nature of the current spurt is the relative inactivity of foreign
portfolio investors. When the Sensex rose by almost 4,000 points
between December 2005 and May 2006, the northward move was spurred
by a generous dose of FII investments-all of Rs 29,225 crore.
In sharp contrast, the run-up from 8,800 levels of mid-June to
close to 11,700 (3,000 points) has been on back of just Rs 5,445
crore of FII greenbacks. Of course, much of those recent inflows
are in a handful of stocks, namely Infosys, Satyam, Reliance Industries
and Bharti Airtel. Don't forget that just three stocks-Infosys,
Satyam and Reliance Industries account for a little over one fourth
(26.11 per cent) of the Sensex's weightage. Of the 30 Sensex stocks,
26 are still trading comfortably below their May 11 peaks. "Only
the big boys like Infosys have contributed to the rise in the
market, the rest are still lagging," says Baliga. Only three
companies Infosys (11 per cent), Satyam (6.3 per cent) and Reliance
Industries (2 per cent) are up above their previous all-time highs
which were recorded when the Sensex scaled 12,671 in May. Hindalco
Industries (down 29 per cent), Reliance Energy (down 28 per cent),
Tata Steel (down 21 per cent), Ranbaxy (down 18 per cent) and
Hero Honda (down 17.5 per cent) have the major losers among Sensex
stocks, in comparison with their May 11 peaks.
IPO Blues: An Accurate Barometer |
A healthy secondary market
is a perfect canvas against which growth-oriented companies
can raise capital from the public. That the current rally
from 8,799 on June 14, 2006 to 11,724 on August 30 is a
bit of a mirage can be reinforced by the lack of activity
in the primary market for initial public offerings (IPOs).
Since mid-June, when the indices started moving northwards
again, just five companies have raised capital via the IPO
route. Of these only two, GMR Infrastructure and Tech Mahindra,
were oversubscribed. Together they raised Rs 1,266 crore.
That compares poorly with the Rs 14,600 crore raised via
37 issues between December and June 2006, the phase in which
the Sensex rocketed from 8,784 to 12,671. The pipeline till
the first 11 days of September doesn't look exciting either,
with six companies hoping to raise a measly Rs 300-odd crore.
"The poor volumes in the secondary market have been
responsible for the lack of confidence in the primary market.
Till FII inflows don't get stable and volumes don't pick
up in the secondary market, we are not going to see a huge
rush for IPOs," says S. Ramesh, Executive Director,
Kotak Mahindra Capital Company. "Most of the IPO market
was mid-cap driven. With the recovery still not happening
in the mid-cap space as well as not many successful issues
hitting the primary market, bankers are cautious to float
an IPO," adds T.R. Ramaswami, CEO, Association of Merchant
Bankers of India. Apart from the lull in volumes, the lack
of confidence in the market is also due to the loss made
by investors in the IPOs. For example, Deccan Aviation was
last quoting 43 per cent lower than its offer price last
fortnight. And 16 other companies, which IPOed between December
and June, are trading at discounts, many of them in the
25-50 per cent range. Ramesh points out that there is a
huge backlog of issues waiting to hit the markets. But the
reluctance of bankers in taking the plunge is an accurate-enough
barometer-more accurate than the Sensex for sure-of the
current subdued interest in Indian equity.
|
All's Not Well In Mid-caps
Move away from Sensex and into the mid-caps-which
is the hunting ground for most retail investors-and the scenario
deteriorates further. As Karvy's Baliga explains: "Unlike
the Sensex, the mid-cap index has not recovered." On the
face of it, the 32 per cent gains of the mid-cap and small-cap
indices since mid-June may compare well with the Sensex's 33 per
cent upturn, but don't forget that the mid-cap and small-cap benchmarks
also crashed more spectacularly than the Sensex. Between May 11
and June 14, when the Sensex lost 30.5 per cent; the smaller indices'
losses were in the 40 per cent region (43 per cent for the small-cap
index). Of the 303 stocks that constitute the mid-cap index, 287
are trading below their May 11 levels. Of these 287, 105 stocks
are still trading 25 to 57 per cent lower than their May 11 quotes.
Similarly of the 498 stocks traded on the small-cap index, 459
are trading lower than their closing prices on May 11, of which
240 are trading lower by 25 to 72 per cent.
Since last fortnight, one glimmer of hope
has been an improvement in the ratio of advancing and declining
stocks. For the entire month of August, the average advance-decline
ratio on the BSE settled at 1:1. That's still no reason to bring
out the champagne but the ratio looks better than 0.8:1.2 in July.
Which means that although the markets were rising in July, the
number of stocks falling was larger than those moving northward.
"The advance-decline ratio indicates the underlying sentiment
in the market. The current ratio indicates that the market is
cautious," says Gagan Banga, Executive Director, Indiabulls.
Concerns Remain
![](grfx/88.jpg) |
"People are still nursing their wounds
following the sharp fall"
Andrew Holland
Head (Strategic
Risk Group)
DSP Merrill Lynch |
At the time of writing, the markets were showing
little signs of cooling off, and every point gained is matched
with an increasing level of nervousness. "A rise in the market
from here would be a cause for concern, as valuations will once
again be overstretched and will override fundamentals," points
out Vaishali Nigam Sinha, Executive Vice President & India
Head (Investment Banking), Daiwa Securities SMBC.
The picture is not totally gloomy, though.
The report cards of corporate India for the first quarter have
been impressive-sales are up 27 per cent and net profits up 34
per cent. But as long as the FIIs continue to remain lukewarm
to Indian equity (see Is The FII Fury Finished?), and as long
as retail investors continue to tread with trepidation, the markets
will continue to look directionless. "Retail investors are
responding slowly to good news. Until they come into the market,
we are not going to see any major upward movement," says
Manish Sonthalia, Vice President, Equity Strategy & Portfolio
Manager, Motilal Oswal Securities. Baliga rules out a "panic
fall", but senses a correction back to the 10,200-10,500
levels. Banga sees the Sensex moving in the 10,000-11,200 range.
"As long as corporate India continues to deliver 15-16 per
cent earnings growth, we don't see any major fall in the market.
However, I don't see the market touching a new high and it's no
longer a runaway market," he adds. The biggest bugbears of
volatile crude oil prices and rising interest rates continue to
spook investors. That's why Banga points out that the current
run-up is "no more a secular bull run. Unlike the last three
years, during which all sectors were re-rated, from now onwards
it will be a stock pickers' market." For Holkar and his ilk,
it will be some time before they are able to scent profits on
the brave bets they made during the manic phase on Dalal Street.
|