INDIAN markets will go through a difficult period in the next three months with more downside than upside, according to Rakesh Jhunjhunwala. The big bull of Indian markets cites inflation and government inaction as major risks for the markets. Inflation, due to its impact on interest rates, growth and corporate earnings, has remained significantly higher than the central bank’s comfort zone, suggesting more rate hikes in future that will mean slower growth and lower earnings. The scams and the government’s involvement with Hazares and Baba Ramdevs have affected the decision-making process, resulting in no headway in reforms.The other major concerns, according to the Third Financial Stability Report of the RBI, include the looming sovereign credit crisis. The troubles being faced by Greece have the potential to spread to its neighbours, including the advanced economies in the European Union. Europe is therefore likely to remain troubled despite France and Germany outlining an agreement to aid debtburdened Greece but this may result in lowering of their ratings. The rising debt and deficit levels of the US, UK and Japan are also drawing the attention of rating agencies.
Consumer demand, the main driver of the economy, is slowing with consumer durables showing negative monthon-month growth.
The pledging of shares may again come to haunt the markets in a big way, leading to some sharp dips if the ongoing down-trend is not arrested due to lack of depth and no retail participation. Retail investors only come to sell when there is negative news. The present market conditions may also lead to Foreign Currency Convertible Bonds (FCCBs) haunting the corporate sector which may struggle to repay FCCBs worth more than Rs 24,000 crore since the same may not get converted into equity due to the low prevailing market prices at which their equities are trading. Another worry for the markets is the steady deceleration in exports and non-oil imports, indicating a slowdown in investment demand. The consumer demand, the main driver of the economy, is also seen to be slowing with consumer durables showing negative month-on-month growth. Car and auto sales are also showing sluggishness with infrastructure and industrial output indicating that the slowdown in the next couple of quarters may go deeper than what the markets may be expecting.
The valuations of the Indian market after the recent correction appear reasonable though it still trades at a premium compared to other emerging markets. India still remains an expensive market for FIIs in terms of price-earning (PE) and price to book value (PB) multiples — looking to the quality of fundamentals such as inflation, current account and fiscal deficit. India is trading at a PE multiple of 14-15 times compared to the average of 10 times for emerging markets, about nine times for Brazil and Korea, and six times for Russia. This works out to a premium of at least 40% and in some cases more than 100%. This valuation premium is increasingly at risk because Indian companies are likely to see a drop in return on equity due to rising competitive intensity and deceleration in capital formation continuing to affect their profitability. Investors should not try timing the markets but start taking systematic exposure in good stocks every time the market takes a sharp dip for long-term returns.
Stock ShopBY RAKESH BHARDWAJ
IFCI
(CMP Rs 44)
IFCI is one of the oldest NBFCs involved in project finance, financial services, non-project specific assistance and corporate advisory services. It has a huge amount of investments in listed and unlisted stocks and a land bank of 7.5 lakh sq feet in prime localities of Mumbai and New Delhi. It has already cleaned almost all its NPAs and has a healthy capital adequacy ratio of 20%.
The government’s proposal of giving fresh banking licences to FIs / NBFCs could be positive news for the company since it is looking to enter commercial banking. Another trigger for the stock could be the process of inducting a strategic investor, which would invest fresh funds and unlock the value of the company. These developments, as also the improved outlook for financial services and increased value of investments and property, may lead to rerating of the stock. Investors can buy the stock at current price with limited downward risk and decent returns in the medium term. The stock, available at a 52-week low, is otherwise safe with a book value of Rs 52 and a PE of just 4.6 as against the industry PE of 9.6 and a 10% dividend.
IFCI
(CMP Rs 44)
IFCI is one of the oldest NBFCs involved in project finance, financial services, non-project specific assistance and corporate advisory services. It has a huge amount of investments in listed and unlisted stocks and a land bank of 7.5 lakh sq feet in prime localities of Mumbai and New Delhi. It has already cleaned almost all its NPAs and has a healthy capital adequacy ratio of 20%.
The government’s proposal of giving fresh banking licences to FIs / NBFCs could be positive news for the company since it is looking to enter commercial banking. Another trigger for the stock could be the process of inducting a strategic investor, which would invest fresh funds and unlock the value of the company. These developments, as also the improved outlook for financial services and increased value of investments and property, may lead to rerating of the stock. Investors can buy the stock at current price with limited downward risk and decent returns in the medium term. The stock, available at a 52-week low, is otherwise safe with a book value of Rs 52 and a PE of just 4.6 as against the industry PE of 9.6 and a 10% dividend.
The author has no exposure in the stock recommended in this column. gfiles does not accept responsibility for investment decisions by readers of this column. Investment-related queries may be sent to gssood@gfilesindia.com with Bhardwaj’s name in the subject line.
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