Lead Story

There’s always an opportunity even in the worst of times. ETIG finds that investing in companies, which are thriving in these inflation-driven times, can provide some insulation against the rising cost of living

WHILE THE global media is making a hue and cry about rising inflation and its effect on the purchasing power of consumers, the other side of the coin seems to have been totally ignored. It is true that high inflation is hitting consumers hard, but investors can turn this to their advantage. Yes, there are a few industries which are gaining from inflation and investing in them will be a wise decision in the long run. The law of physics states that energy cannot be destroyed, but can be transferred from one form to another. Similarly, it can be said that in an economy, money cannot be destroyed (although unlike energy, it can be created out of thin air!), but transferred from one hand to another. Hence, if you are losing money due to inflation, there ought to be someone who is making money because of it. ETIG studied a host of industries to find out the leaders and laggards of inflation.

The A, B, C Of Inflation
But first, we need to analyse and understand the nature of current inflation. The current inflation is broadbased, as well as global. It is driven by rising demand for agricultural, metal and fuel products. Most experts agree that the present inflation is not a case of ‘lot of money chasing too few goods,’ but a genuine case of supply shortages.

India’s inflation, referred by the benchmark wholesale price index (WPI), had remained at around 4% for over six months since September ’07, but started rising in early ’08. For the week ended March 30, ’08, inflation reached a three-year high of 7.41% — substantially above Reserve Bank of India’s (RBI) target of 5%.

An important characteristic of the current rally in WPI figures is that it is widespread — the price index of manufactured goods jumped by 7.12%, primary articles by 8.89% and power & fuels rose by 6.65%. Primary articles have emerged as the largest driving factor for inflation over the past few weeks.

It must be noted that the current high inflation figure is suppressed, as the complete burden of rising oil prices is not passed on to consumers.

Losers & Gainers
There is a general belief that inflation is bad for the economy and industries. However, in reality, moderate inflation, coupled with adequate liquidity, is necessary for the industrial growth of any economy.
Amitabh Chakraborty, president (equity), Religare Securities says, “Moderate inflation is good for the stock market because a company’s pricing power increases, but a persistent inflation above 5%, with no growth, is stagflation, which is actually negative for the economy.”
Spiralling inflation above moderate levels hurts economic growth in different ways. The current inflation is building up raw material cost and hence, putting a pressure on margins. If this burden is passed on through an increase in prices of end products, the industrial sector will be least affected because of inflation.

But even the pricing capacities of these industries have limitations. Another factor is policy intervention to contain inflation and inflationary expectations. Fiscal and monetary measures undertaken for containment of inflation are more devastating than the underlying inflationary pressure.

Mr Chakraborty elaborates, “All interest-sensitive sectors will be hit, be it real estate, banking & financial services, automobiles and retail industry. We also believe the FMCG sector will be hit because higher inflation means less purchasing power in the hands of common man to buy soaps and oil.”

With a rise in prices of agricommodities, the FMCG industry may witness a pressure on margins if it cannot effectively raise prices. Vivek Pandey, fund manager, SBI Magnum Mutual Fund, says, “High costs will bring down operating margins of FMCG players by 30-40 basis points, which is more likely to be seen in Q1 FY09.”

But available evidence suggests that FMCG companies have so far done well and are posting strong growth in earnings, thanks to rising toplines and stable or rising operating margins. A similar trend is visible in other sectors including capital goods, chemicals, metals including steel, and cement among others (refer to Page 2).

Financials services, commodities and oil marketing companies are bound to face the brunt of inflation, says Rajat Rajgarhia, head of institutional research at Motilal Oswal.
He further adds, “It is a generally used strategy to raise interest rates to combat inflation. This will tighten money supply, which will affect the banking sector. Going forward, thanks to the government’s intervention, commodity industries such as cement or steel can also face a curb on free pricing.”

Make The Most Of It

Nonetheless, there is always an opportunity even in the worst of times. Out of the 16 industries analysed by ETIG, more than half show a positive or neutral impact of inflation. This offers investors a good opportunity to park their funds in inflationproof stocks. So, even though investors’ household budget may have gone out of shape, returns from the equity market may provide some insulation against the rising cost of living. Anyhow, in the long run, equity is the best hedge against inflation. As for your household budget, things may ease only after the next 6-7 months, when the government’s anti-inflationary measures begin to show results.

Natural Gas Companies: Pump Up The Volumes

The short-term outlook for natural gas companies has turned negative, but their long-term prospects remain bright. Investors can consider Gail, Gujarat Gas and Gujarat State Petronet with a horizon of 1-2 years

NATURAL GAS is a scarce commodity in India, with huge unmet demand and limited supply. It is a cheaper and cleaner source of energy compared to crude oil. However, it needs a network of pipelines for transportation from the point of production to the point of consumption. This has necessitated the development of natural gas transmission companies in bulk, as well as retail segments.

India today consumes around 95 million standard cubic metres per day (mmscmd) of natural gas, of which, over 65% is produced by state-owned exploration majors ONGC and Oil India. Nearly 20% of this is imported by way of liquefied natural gas (LNG), while the rest is produced by private players.

Among listed natural gas companies, Gail is India’s largest cross-country transporter with pipelines stretching over 7,800 km. Gujarat State Petronet is another bulk transporter of gas, but its infrastructure is entirely located in Gujarat. Gujarat Gas and Indraprastha Gas are retailers with well-established city gas distribution (CGD) networks.

India’s natural gas industry appears to be on the cusp of a major change with Reliance Industries’ Krishna Godavari basin oil blocks expected to commence gas production in the second half of ’08. When the gas production reaches its peak in ’09, the output is estimated to be equivalent to nearly 80% of India’s current consumption.

This will be supplemented by output from other players such as Gujarat State Petroleum (GSPC) and ONGC, which are also developing their oil & gas fields on the east coast. All put together, the availability of natural gas is set to jump three-fold in the next four years. This augurs well for natural gas transporters. Their revenues will shoot up as capacity utilisation levels of their networks increases.

In the short term, however, government policies are adversely affecting the growth of India’s natural gas industry. The government recently revoked the freedom of sale to third parties granted to the Panna, Mukta, Tapti (PMT) joint venture and appointed Gail as the sole evacuee for its entire production of 17 mmscmd. According to the government, this decision was taken to ensure sufficient gas supply to the priority sectors, viz fertilisers and power. However, the move goes against the commercial interest of PMT, which is the country’s largest producer of natural gas.
In another development, the Petroleum and Natural Gas Regulation Board (PNGRB) unveiled regulations for city gas distribution (CGD) projects. Besides setting out eligibility criteria and granting exclusivity to the players, these regulations put a cap on network tariffs and compression charges. The regulations also seek to cap the rate of return on capital employed (RoCE) at 14%.

While Gail stands to gain from this, private players are at the receiving end. As a result, their stocks have fallen heavily over the past couple of months. Gujarat Gas has lost over 33%, Indraprastha 23% and GSPL 24% — which is more than the 16% fall witnessed in the Sensex. In contrast, Gail’s stock has sustained its level at around Rs 425 between February and April ’08.

The redistribution of PMT gas will impact final consumers as well as transporters. Gail’s pipelines will witness an increase in volumes, and with the $0.12 per mmscmd transportation charges, the company will gain from this arrangement. On the other hand, Gujarat State Petronet will witness a minor reduction in the volumes transported through its network. Gujarat Gas is set to suffer as its supply has been curtailed by around 0.7 mmscmd. This will leave the company with limited volume of gas, which will be just sufficient to satisfy its existing CNG and PNG customers. As no alternative sources of gas are likely to be available in the near future, this will hamper its growth in the near term.

The cap on network tariffs and compression charges will also have a negative impact on Gujarat Gas and Indraprastha Gas, which operate in the CGD business. However, Indraprastha Gas will suffer more as it mainly uses gas at administered prices (APM). Indraprastha’s RoCE has consistently stayed above 40% for the past five years, which will now reduce sharply. The only solace for these players is that their marketing margins continue to remain free of these restrictions.

Thus, while the short-term outlook for natural gas transporters has turned somewhat negative, their long-term prospects continue to remain bright. As more gas becomes available, all these players will register healthy revenue growth on the back of higher volumes. Since the scrips of these companies have come off their highs substantially, investors should consider putting their money in them — particularly Gail, Gujarat Gas and Gujarat State Petronet — with a long-term horizon of 1-2 years.

Himadri Chemicals: Black Gold

Himadri Chemicals’ ability to maintain strong margins and growth momentum, make its stock attractive for long-term investors

KOLKATA-BASED Himadri Chemicals (HCIL) has lost 45% of its market capitalisation in the past three months even though its future growth prospects continue to be strong. HCIL is a leading player in coal tar derivatives, which are vital inputs in the production of aluminium and steel. The company is now expanding its capacities as well as product portfolio which, considering its ability to maintain strong margins, makes the scrip attractive for long-term investors.

BUSINESS:
HCIL has a combined coal tar distillation capacity of 2,19,000 tonnes per annum (tpa). It manufactures derivatives of coal tar such as coal tar pitch (CTP), creosote oil and naphthalene. CTP is primarily used in the aluminium and graphite industries and HCIL holds over 70% market share in India. Its clients include Nalco, Balco, Hindalco, Indal and HEG among others.

HCIL is a leader in a market that is growing fast resulting in improved operating margins. HCIL has also drawn up an aggressive capex plan to quadruple its capacity by ’12 at a cost of Rs 1,600 crore. Recently, HCIL raised Rs 118 crore through preferential warrants allotment and the board has approved an $80-million FCCB issue to finance the expansion.
In January ’08, it commissioned its 120-tpa advance carbon material plant in West Bengal, which will be expanded to 4,500 tpa by ’12. This plant will produce special grade carbon required for manufacturing lithium ion batteries. Further, HCIL has acquired a company in Hong Kong to expand its geographical footprint. It has also opened a representative office in China to streamline its import activities.

GROWTH DRIVERS:
Under the current expansion plan, HCIL’s distillation capacity will double to around 0.5 million tonnes by the end of FY09. Similarly, its 50,000-tpa carbon black plant will be commissioned during the year, while the full benefits of the advance carbon plant commissioned in January ’08 will also be available to the company. These will drive HCIL’s sales growth during FY09. On the other hand, the margins will be maintained at the current levels, thanks to rising demand and new value-added products.
The aluminium industry, which consumes nearly 80% of the coal tar pitch produced globally, is expected to grow at a CAGR of 7.5% over the next 3-4 years and the production of steel representing around 13% of the CTP consumption, is growing at around 6%. This, in turn, will boost demand for coal tar pitch.

FINANCIALS:
Since FY01, HCIL’s net profits have increased at a CAGR of 110% to Rs 323.3 crore in FY07 while sales have posted a CAGR of 32.5%. In the same period, the RoCE improved from less than 10% to 30%. During the quarter ended December ’07, HCIL posted 30% growth in net profit despite a 3% increase in revenues. The sales growth appeared muted mainly because of a weak pricing scenario. However, HCIL improved its operating margins even as its other income came down sharply.

VALUATIONS:
As HCIL’s expanded coal tar distillation capacities come on stream over the next year, the company is likely to nearly double its operating profits. Taking into account the recent preferential warrant issue, HCIL’s equity on a fully diluted basis stands at Rs 34.27 crore. It is expected to post earnings of Rs 39.9 per share for FY09 — nearly 70% above the EPS of 23.4 projected for FY08. This provides an attractive opportunity for long-term investors.

Crude transport clouds over Cairn despite many positives

OIL exploration and production company, Cairn India, has for the first time, come out with a reserves estimate for its exploration activities, apart from the Rajasthan fields. The development is likely to boost its valuations in coming days. The company disclosed that its exploration portfolio provides exposure to net unrisked recoverable resources in excess of 1 billion barrels of oil equivalent (BoE). This is a significant reserve accretion for the company, which could be valued at around $4-5 billion adding over 40% to its current market capitalisation of $10 billion.
Despite the positives, the company has been unable to resolve uncertainty over the cost of pipeline to transport crude oil to a port in Gujarat. The government has not approved the company’s request to include the $800 million cost of constructing the pipeline in the field development plan (FDP). However, it has already awarded the contract to construct the pipeline and work is expected to begin from second half of 2008.

Cairn India has also raised its estimates of proven and probable (2P) gross reserves from the three main Mangala, Bhagyam and Aishwariya (MBA) fields by 9% to 685 million barrels. The other Rajasthan fields have a gross 2P estimate of 1.7 billion barrels of oil equivalent (BoE). With the increase in reserves, the company also increased its production target from these fields by 16.7% to 1,75,000 barrels of oil per day (BOPD), while emphasising the production to start in H2 2009.

While exploring in different blocks for hydrocarbons, Cairn is also working on methods to extract more from the existing reserves. The production from its Cambay basin field reached its highest ever level in February 2008 as new wells drilled recently became operational. To boost its recoverable reserves from its Rajasthan fields, Cairn India has successfully tested enhanced oil recovery (EOR) techniques in laboratories. This is likely to add nearly 300 million barrels of incremental recoverable oil once implanted from year 2013 onwards.
Cairn posts Rs 24.5-cr loss

Cairn India has reported a loss of Rs 24.5 crore for the year ended December 31, 2007, compared with a loss of Rs 18.7 crore in the previous year. The strengthening of the rupee against the dollar resulted in the company recognising an accounting loss due to foreign exchange fluctuation of Rs 14.05 crore ($34.5 million). This arises on account of deposits held in dollars by foreign subsidiaries, which are intended to be used for capital imports. For the fourth quarter, the company has posted a loss of Rs 13.9 crore.

Praj Industries: The Perfect Blend

Praj Industries is in an expansion mode and has a healthy order book position. The stock appears attractive for long-term investors

THE CURRENT market meltdown has drastically reduced the valuations of several companies. However, in quite a few cases, the market has been too harsh on companies which have a promising future. This has created an excellent opportunity for long-term investors. One such company is Praj Industries, which has long been the market’s darling, due to its growth prospects in the ethanol industry.

The company has lost over half its market capitalisation in the past two months, without any corresponding change in its fundamentals or future outlook. Given that the company is in an expansion mode and is sitting on a healthy order book, it is expected to post a good performance next year. Long-term investors can consider the stock at current levels.

BUSINESS:
Pune-based Praj Industries is an engineering company and is the market leader in ethanol technology. It provides turnkey project implementation services to set up ethanol distillation units. The company has developed technologies to produce ethanol from a variety of feedstock such as sugarcane, sweet sorghum, corn etc and is trying to develop a commercially viable method to convert cellulose into ethanol. Besides ethanol — which accounts for over 80% of its revenues — the company also carries out distillation for breweries and plans to enter the bio-diesel space.

Praj has executed projects in over 35 countries. Over the past couple of years, it has taken steps to strengthen its global presence. These include an acquisition in the US and tie-ups with foreign companies in Europe and Brazil. With this, the company has established its presence in key markets across the world.

Over the past couple of years, the company’s shareholding pattern has witnessed a peculiar trend. The shareholding of the promoters and public has fallen, while institutional holding is on the rise. This indicates that the company is gradually becoming a professionally-dominated organisation, from a promoter-driven one. This augurs well for the long-term growth sustainability of its business model. Some of the most successful companies such as Larsen & Toubro,
ITC, HDFC and Infosys are majority owned by institutions.

GROWTH DRIVERS:
Ethanol and bio-diesel are gaining acceptance worldwide as eco-friendly fuels. Ethanol blending has already become mandatory for petrol in a number of countries, including its largest consumer, the US. The proportion of blending is slated to go up, with governments in the US and India mandating 10% blending over the next 2-4 years. The European Union is also contemplating to replace 10% of petrol consumed with ethanol. This is likely to create strong demand for turnkey solutions providers such as Praj Industries. The company already has an order book of Rs 900 crore, which will be executed over the next 12 months.

Praj is gearing up to cater to the fastpaced growth in future by expanding its capabilities. It has increased its manpower and set up its second manufacturing unit at Kandla SEZ. It has also established a full-fledged research centre for bio-fuels to develop new technologies in this field.

FINANCIALS:
Praj’s net profit has witnessed a cumulative annual growth rate (CAGR) of 43.2% over the past 10 years, while its net sales have grown by 27.3%. Although its dividend per share has increased over the past four years, dividend payout ratio has fallen, thanks to rapid spurt in net profit. The company has already disbursed 33% of its reported book profits for April-December ’07 via interim dividends.

Praj’s performance during the quarter ended December ’07 was lacklustre as it is in an investment phase currently. Its profit grew by 17.2% to Rs 39.4 crore, while net sales rose by just 1.3% to Rs 180.2 crore. But employee costs and other expenses rose significantly.

VALUATIONS:
At the current market price of Rs 132.10, the scrip is trading at a price-to-earnings multiple (P/E) of 19.8 based on its earnings in the past 12 months, which is nearly half its P/E just a couple of months ago. Considering Praj’s current order book, ability to win new orders and investment in research & development, we expect the company to maintain its EBIDTA margins above 20%. For FY09, we expect Praj to report earnings per share (EPS) of Rs 10.1. This discounts the current market price by 13.1 times, which appears attractive for long-term investors.

RISKS:
Despite staying debt-free, the company has expanded its equity capital on several occasions to raise funds. This has resulted in dilution of earnings. If this trend continues in future, it will be detrimental to the interest of retail investors.

Kiri Dyes and Chemicals: Simply Colourful

Kiri Dyes and Chemicals appears to be a good investment bet, considering its growth prospects from backward integration

COMPANY: KIRI DYES AND CHEMICALS

ISSUE SIZE: Rs 46.88-56.25

CRORE PRICE BAND: Rs 125-150

DATE: MARCH 25-APRIL 2, ’08

KIRI DYES and Chemicals (KDCL) is a Gujarat-based manufacturer of dyes and dye intermediates and caters to textiles, leather, paint and printing ink industries. It has a total production capacity of 10,800 tonnes per annum (tpa). It’s coming out with an initial public offering (IPO) to fund its proposed backward integration project to produce raw materials. Post-expansion, the share of chemicals and intermediates will go up in KDCL’s total revenues vis-à-vis revenues from dyestuff.

BUSINESS:
KDCL mainly manufactures reactive dyes, which are used in cotton-based fabrics and represent the single largest dyestuff produced globally, accounting for over 25% of total production. It operates four manufacturing units — three in Ahmedabad, which manufacture dyestuff, and one in Vadodara, which produces intermediates.

KDCL was traditionally a dyes manufacturer, but started manufacturing intermediates such as vinyl sulphone and H-acid in FY07. These intermediates accounted for a quarter of its total revenues in the first half of FY08. Nearly half of its turnover comes from exports, with Turkey, Korea, the US and Bangladesh accounting for two-thirds of its total exports turnover. To facilitate exports, KDCL has converted one of its Ahmedabad units into an export-oriented one, which enjoys tax exemption on export income till FY10. InNovember ’07, KDCL entered into a 40:60 JV with Zhejiang Lonsen Company to manufacture all types of dyes. Under the JV, a 20,000-tpa plant will be set up in India, which is scheduled to begin commercial production by end-’08.

The growth in the $23-billion global market for dyes, pigments and dye intermediates, has slowed down and is expected to hover around 2% over the next decade. This has increased competition in the industry and eroded its pricing power. India leads the production of reactive dyes in Asia. It currently exports nearly Rs 3,500 crore of dyestuff, 60% of which is contributed by dyes.

EXPANSION PLANS:
KDCL proposes to set up a 180,000-tpa greenfield intermediate chemical plant and a 2.9-mw co-generation power plant at Vadodara at a capital cost of Rs 43.8 crore. This will help it to secure raw materials at a reasonable cost, besides providing it with another source of revenue.

FINANCIALS:
For the half-year ended September ’07 (H1 FY08), KDCL reported a net profit of Rs 8.9 crore and revenue of Rs 97 crore. Between FY03 and FY07, its profit witnessed a CAGR of 20.8%, against a revenue growth of 10%. It has consistently improved its operating margins over the past few years, which stood at 15.8% during H1 FY08. Its debt-equity ratio fell to 1.31 on September 30, ’07 from 1.76 as on March 31, ’07. Its operating cash flows also turned positive during H1 FY08 after staying negative for a couple of years. This was due to a substantial fall in its debtors, coupled with rise in current liabilities.

VALUATIONS:
We expect KDCL to report an EPS of Rs 11.9 for the year ending March ’08 on post-issue equity of Rs 15 crore. Based on current market conditions and the company’s expansion plans, the forward EPS for FY09 and FY10 is 16.3 and Rs 21, respectively. At the lower and upper price bands, the P/E works out to Rs 7.6 and Rs 9.2, respectively, based on FY09 expected EPS. KDCL issued 12.5 lakh equity shares to pre-IPO investors at an average price of Rs 115.5. Considering this and the proposed IPO, the promoters’ holding will come down to 66.57%. Thanks to the current market meltdown, a number of comparable dyestuff and chemical companies are available at cheap valuations. For example, Atul is trading at a P/E of 6.8, Aarti Industries at 6.4, Bodal Chemicals at 4.1 and Metrochem Industries at 13.3. KDCL is currently passing through a phase of high growth and hence, its valuations appear reasonable.

The End May Be Over

The stock market appears to have neared its bottom and further downside looks limited. Though the situation remains volatile, most of the current indicators are pointing towards stability. The long-term outlook appears clouded, but with a positive undertone. India Inc’s Q4 results will give a clear picture as to what lies ahead

SUDDENLY, WHEN everything appeared to be going smooth, the stock market hit a speed breaker. As the problems in the US economy, led by the collapse of its housing industry and the subprime crisis, spiralled out of control, the investor community, globally panicked. The weakness in the stock markets worsened with large financial institutions selling off their stock market portfolios across the globe to meet the liquidity crisis. Once the fall began, it snowballed to gargantuan proportions, with most listed companies in the domestic stock market losing between 30% and 50% of their market capitalisation in the space of two months.

The downward journey of the stock market was accompanied by daily doses of bad news. The bears used every piece of negative information to hammer down stock prices. Before they could realise and react, retail investors were left with heavily depreciated portfolios.

However, we at ETIG, believe that the time has come to stop despairing and do a reality check. To assess and take stock of the situation, we carefully examined five factors that are most important for stock markets, namely, the economic outlook, global currency movements, India Inc’s quarterly performance, current market valuations and the Sensex’s technical overview. We believe that the five parameters determine the market’s movement in the long term. Our analysis reveals that the market seems to have reached its bottom, but some short-term volatility cannot be ruled out. Thus, longterm investors may find excellent opportunities to enter the market over the next few days. The others may consider entering once definite signs of recovery are visible.

MACRO SIGNALS
It’s true that in the case of a slowdown in the US, India’s exports to that country can go down. However, just around 14% of India’s exports are sent to the US, which means that the direct impact may not be that severe. On the contrary, it is believed that if US companies start facing the heat, they may be forced to outsource more to low-cost destinations such as India. This will increase India’s service and manufacturing exports to the US and improve the growth prospects of Indian companies in sectors such as IT&ITeS services, textiles and auto components.

Apart from problems emanating from the US, India still has its own worries. During ’07, the domestic manufacturing industry witnessed a slight, but persistent slowdown in growth to just 8.4% for the quarter ended December ’07, which further slowed down to 5.2% in January ’08. The performance of six core infrastructure industries decelerated sharply in January ’08, recording 4.2% growth, against 8.3% during January ’07. Fortunately, however, the services industry that contributes to more than half of India’s GDP continues to grow at over 10% yearon-year. The growth in the services industry is expected to push India’s GDP growth to 8.7% during FY08.

Going forward, the Indian economy and India Inc are also likely to get a boost from huge capital expenditure currently under implementation across manufacturing and infrastructure sector. Recent data from the Centre for Monitoring Indian Economy (CMIE) reveals that the total investment under implementation has grown to over $630 billion in the quarter ended December ’07, nearly 50% higher compared to $425 billion during the quarter ended June ’06. Even if just half of these projects get completed over the next three years, it will nearly double India Inc’s current asset base of $300 billion.

Considering India Inc’s current revenueto-assets ratio of 1.8, this additional investment can generate recurring annual revenues of over $500 billion for Indian companies. And if we assume that even around half of these revenues come to the listed players with their PAT-to-sales ratio remaining intact, their revenues and net profit will expand by around 60% and 50%, respectively.

Hence, this trend of rising investments, which hint at expansion of the economy, can be heartening. But a slowdown in the growth of imports of capital goods contradicts this view. The imports of capital goods registered an 18% growth in the April-October ’07 period, against a 48% jump recorded in the corresponding period of the last year. The domestic production of capital goods, however, continues to grow strongly.

But with high crude oil and food prices, inflation can be another major problem for the Indian economy. After staying at around 4% level for 25 consecutive weeks, inflation has risen steadily above 5.92% for the week ended March 8, ’08. The government is trying hard to control inflation with a variety of subsidies and proposed a 2% cut in excise duty across the board in the recent Budget. However, such measures will put pressure on the government’s exchequer and worsen fiscal deficit, thus resulting in higher inflation later.

CRUMPLING DOLLAR
Currency movements hold the key to fund flows across nations and can influence the stock markets strongly. As a direct result of the weakening US economic growth, the dollar has weakened substantially against global currencies over the past few months. Over the past 12 months, the US dollar has lost over 18% against major international currencies such as the Japanese yen and euro, while it has depreciated around 4% against the pound sterling and 8% against the Indian rupee. With the US Federal Reserve cutting interest rates relentlessly, the dollar’s position against its peers can deteriorate further in future. As the interest rate gap widens, logically, dollar investments should start flowing into emerging markets, which has not happened so far. However, as and when the uncertainty ends and the market comes out of the crisis engulfing the global financial institutions, foreign investors are likely to return to the equity markets.

THE MAGIC OF NUMBERS
But India Inc’s quarterly results will be the single most important specific indicator of the stock market’s performance over the next few months. Over the past few quarters, Corporate India has reported deceleration in earnings growth, which is worrying market participants. Worse still, bottomline growth is being increasingly fuelled by growth in the other income, rather than operating income. While the operating profit margin on an aggregate level appears intact, sales growth has visibly slowed down. For example, the set of companies, which reported a year-on-year (y-o-y) earnings growth of 31.6% in December, has recorded a y-o-y growth of just 16.4% in the December ’07 quarter.

How the future plays out will depend on India Inc’s results for the March quarter (Q4 FY08) over the next couple of months. And if the corporate advance tax figures are any indication, the tone appears robust. The advance tax payments for Q4 FY08 have jumped 110% compared to last year, indicating better corporate results than what the current sentiment indicates.

The market has so far been wary of unpleasant surprises in Q4 results, fearing that companies may report heavy losses from treasury operations. The fears were fuelled by two major instances — firstly, when ICICI Bank reported its $263-million markto-market losses to its portfolio, and secondly, when L&T acknowledged a potential Rs 200-crore loss on hedging transactions, or nearly 10% its estimated FY08 net profit. The advance tax payments of both these companies have doubled during the current quarter, which should put investors’ worries to rest.

WORTHY OF YOUR ATTENTION
The current meltdown has eroded nearly 29% of market capitalisation since January 11, ’08, resulting in more sober levels in the valuation. The Sensex is currently trading at a price-toearnings multiple (P/E) of 19.5, substantially down from 28.4 in January. Compared to this, the benchmark index of China, Shanghai Composite, is trading at a P/E of above 33.

The latest estimates from the International Monetary Fund (IMF) put China’s growth in ’08 at 10%. Against this, the most conservative estimates of India’s growth this year expect the economy to expand by 7%. If we work out the forward P/Eto-growth (PEG) ratio after factoring in these expected growth rates, the Sensex with a PEG of 2.7 appears more attractive against 3.3 for the Shanghai Composite.

We can also look at the valuation issue from another angle. Analysts expect the Sensex to close FY08 with an EPS of Rs 820-830, which is projected to grow over 15% in FY09 and cross Rs 950. At the current level, the Sensex is discounting this forward expected EPS for the next year at 15.8, which is substantially below its average P/E of 18.2 since ’00. This indicates that fundamentally, the stock market has neared its bottom and further downside is limited.
GETTING TECHNO
While we have considered fundamental factors, it will certainly help to take a look at the technicals of the Sensex. The technical analysis depends heavily on past trends in the market movement to predict its future trajectory.

The current bull run in Indian equities started in the summer of ’03 from a Sensex level of just under 3000. In the past five years, we have seen four meaningful corrections.

The first one took place in May ’04, post the debacle of the NDA government at the Centre; the second one occurred in May-June ’06; the third one in early ’07 and finally, the current one.

However, during all the previous three corrections, the lows that the Sensex made were deeper than the lows it had made during the previous corrections. At the same time, after making deeper lows, it went on to make a higher top.

In the last significant correction that we saw in early ’07, the Sensex had made a bottom at around 12300. So, as long as that is not violated during the current crisis, we can still consider the current fall as just a correction in the bull market and expect to see a bounce-back.

At the same time, a point to be noted is the similarity between the current correction and that of May-June ’06. In ’06, the Sensex lost 30% of its value from a high of 12671 in May to a low of 8799 in June.

Similarly, from the intra-day high of 20206 in January to a low of 14677 last week, the Sensex has lost a similar 30% of its value. So, if last week’s lows are not violated, the bottom may just be in place.

While we try to take a stock of the situation, it remains dynamic and ever changing. Most of the current indicators are pointing towards stability. The short-term risk appears to be minimal and the long-term outlook appears clouded, but with a positive undertone.

The quarterly results from April onwards will give a clearer picture about where India Inc stands. At the same time, changes in the economic data in India and more particularly, the US, should also be tracked to get a better view of things. For those investors who have faith in India’s long-term growth story, the next few days may be a good time to enter the market.