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APRIL 8, 2007
 Cover Story
 BT Special
 Back of the Book

Mobile Security
Today, it is all about information and how the right information is sent to the right people at the right time and right place. Uncertainty about how to secure mobile phones in the face of increasing threats is slowing individual adoption of mobile applications. There are many facets of mobile security, including network intrusion, mobile viruses, spam and mobile phishing. Analysts expect big telecom companies to develop security solutions on various security platforms.

Rough Ride
These are competitive times for the Indian aviation industry. As salaries zoom, players are scrambling to find profits. Even the state-owned Indian is now seeking young airhostesses to take on the competition. It is planning to introduce a voluntary retirement scheme for airhostesses above 40 years. On an average, they draw a salary of Rs 5 lakh a year. The salaries of pilots, too, are soaring. According to industry estimates, the country needs over 3,000 pilots over the next five years.
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Business Today,  March 25, 2007

Stock Market Soufflé
The current volatility notwithstanding, market men are pegging fancy long-term targets for the Sensex, 50,000 being just one of them. The reality is that it's being puffed up by just a handful of stocks. The broader market is in the doldrums.
"The focus has suddenly shifted back to large caps and even new investors are chasing safe-haven frontline stocks. That's the problem we are facing today"
Hemendra Kothari, Chairman, DSP Merrill Lynch
In may 2006, some of the country's key economic indicators looked like this: The trade deficit, which is the difference between exports and imports (with the latter being higher than the former), stood at $3.8 billion or Rs 16,720 crore; the prime lending rate (PLR) of commercial banks stood at 10.8 per cent; 10-year government securities (G-Secs) were yielding 7.6 per cent; and inflation hovered around 6.1 per cent.

Cut to February 2007: The balance of trade is now negative to the tune of $5.8 billion or Rs 25,520 crore; borrowers of all hues (retail as well as medium-sized enterprises) are coughing up more what with the PLR climbing to 12.3 per cent; safe-haven assets like fixed deposits and bonds are back in fashion as 10-year government paper breaches the 8 per cent mark; and, last but not least, the monthly budget of households has shrunk with inflation peaking at 6.7 per cent.

If the scenario on the economic front was steadily deteriorating in the nine months between May and February, it wasn't quite reflected on Dalal Street. In fact, the euphoria persisted. After hitting a new high on May 10, 2006, of 12,612 points, the Bombay Stock Exchange's (BSE's) benchmark index did brutally correct over 26 trading days by 29.20 per cent to hit a low of 8,929 points thanks to fears of a global commodity bubble that looked set to implode. However, after duly riding out that crisis, the Sensex rebounded in style, and came within striking distance of the 15,000 mark in early February, hitting 14,697 by the 8th of that month. That the markets have since corrected is another story (attributable to global factors), but the 2,000-odd point spurt in just 180 trading days made you wonder whether punters had taken into account the dark clouds in the macroeconomic picture. It would appear, from the Sensex's spurt-and the pundits' consequent predictions that stretched from 20k to 50k over varying time-spans-that market men were blinded to these worries.

They weren't.

"There has been a slowdown in FII inflows, but the shortfall, more or less, has been made up by higher FDI"
Sushil Muhnot, Managing Director, IDBI Capital markets
For a moment try and look beyond the much-hyped Sensex (and indeed other similar benchmark indices), and consider instead the 30 stocks that give it life. Therein hangs a bearish tale: Just six stocks with a collective weightage of 40 per cent have contributed to the rally. The rest didn't participate at all in the run up to 14,600 levels. In fact, 14 of the Sensex shares have been value destroyers in the May-February period, by as much as 30-54 per cent in a few cases. Look beyond the Sensex and the picture isn't brighter, with the BSE's 286-stock mid-cap and 463-stock small cap indices flat as a pancake. And sectors that were till recently the rage-auto, fast-moving consumer goods, public sector undertakings, metals and pharma-are in various states of neglect (see Does the Sensex Make Sense?). Last fortnight, as markets globally slipped into a free fall, unsurprisingly, back home, the stocks that fell the hardest were those that had fuelled the index's heady rise. For instance, HDFC, HDFC Bank, Reliance Communications, and ICICI Bank were responsible for pushing down the Sensex from the 14,600 levels to 12,500 by March 15.

Meanwhile, bearing the brunt of the apathy to India equity (or at least to most of it) are mutual fund schemes that tapped the markets in 2006 (see No Fun for Funds). Almost all of them have registered negative returns since inception. The net asset value-based returns of DSP Merrill Lynch Mid-cap and Small Cap Fund, for instance, are down by 14 per cent since launch in October, even as the Sensex has moved up by 5 per cent since then. UTI Contra Fund is down 13.14 per cent since being flagged off last March.

"Mid-caps are tomorrow's large caps. I'm not unduly worried"
Nimesh Kampani, Chairman, JM Financial
The big question being asked on Dalal Street these days is: Is the four-year structural/secular/broad-based rally over? Clearly, signs of fatigue have begun to show in the past nine months, and the multi-bagging machine that the Indian market till recently was, is beginning to sputter. "The focus has suddenly shifted back to large caps and even new investors are chasing the frontline stocks. That's the problem we are facing today," explains Hemendra Kothari, Chairman, DSP Merrill Lynch. Adds Asit Koticha, Managing Director, ask Raymond James: "The broader market's behaviour can be attributed to an underperformance in relation to expectations rather than any actual financial (under)performance." A worry is the decline in delivery-based trades, down to 32 per cent, which is the lowest level in years, and which clearly points to the lack of conviction in the long term. This is also reflected in the advance-decline ratio which has been below one for six out of nine months since May (which means there have more stocks falling than rising in these months) for the 1,000 most actively-traded stocks on the National Stock Exchange.

Some sections of the market can't understand why mid-caps are getting the cold shoulder. Earnings growth for this sector is robust (for the December ended quarter, mid-caps showed a 38 per cent growth in profits). And, as Nimesh Kampani, Chairman, JM Financial, puts it: "Mid-caps are tomorrow's large caps. I am not unduly worried."

"India's growth story is compelling. I don't think Malaysia, Philippines and Vietnam markets are big enough to force foreign investors to shift money from India"
Andrew Holland, Managing Director, DSP Merrill Lynch
The ubiquitous foreign institutional investor (FII), and the flows this tribe brings into the country, will have a major hand to play in creating tomorrow's mega caps. After all, it's been largely FII funds-all of $34 billion or Rs 1,49,600 crore in the past four years-that have been instrumental in pulling up the Indian markets from the undervalued stage to one of fair valuation (some would argue to a stage of overvaluation). However, the bad news is that FII inflows are showing distinct signs of flagging. In the last 10 months since May, net inflows have plunged by close to 60 per cent, to Rs 19,408 crore from Rs 46,445 crore in the previous corresponding period. In fact, the last 10 months' inflows are the lowest since 2003. Sushil Muhnot, Managing Director, IDBI Capital Markets, says: "There has been a slowdown in FII inflows, but that has, more or less, been made up by higher FDI (foreign direct investment)." That's cold comfort for investors who've bought shares hoping that foreign money will fuel those shares to dizzier heights. One reason for the subdued FII interest may be that the options for investment for global investors are simply narrowing down. For instance, in a sector like banking, FIIs have reached their respective permissible limits in stocks like ICICI Bank, State Bank of India, Bank of Baroda, Oriental Bank of Commerce, Punjab National Bank and half-a-dozen other state-owned banks. Amongst the Sensex stocks, ICICI Bank and Bharti Tele are two stocks with a total weightage of 17 per cent where the FII limit has been reached.

But fewer options may not be the only reason for the dipping FII inflows. It could just be that the Indian markets have run out of steam in the past 10 months, and other emerging markets-particularly in the Asia-Pacific region- have begun to look more attractive. For instance, the Chinese markets had gained 90 per cent since May 10 till last fortnight; the Sensex on the other hand had inched up by only 3.10 per cent in this period. Yet, there are those who believe that few emerging markets can boast of a story like that of India over the longer term. Andrew Holland, Managing Director, DSP Merrill Lynch, says: "India's growth story is compelling. I don't think the Malaysian, Philippines and Vietnamese markets are big enough to force foreign investors to shift money from India." But the billion-dollar question is whether, barring the elite bellwether stocks, the FIIs have enough conviction in the rest of the pack that's listed on the Indian stock exchanges.

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