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Selective exposure for now
A Selective exposure for now a rally of more than 300 points on the day the RBI raised repo rates for the 13th time is confirmation of the fact that inflation remains the major concern for the markets. The fact that the RBI’s tone was not hawkish this time when its Governor, Dr D Subbarao, stated that further rate hikes may not happen even if the inflation cools to 7% or so was enough for the markets to take a breather. This was followed by some good news from the Euro Zone and the US further fuelled the rally by another 500+ points on the Sensex. Some important measures have, at least for the time being, ensured that a return to the Lehman collapse has been averted.
The US GDP growth of an inflation-adjusted annual rate of 2.5% in the July-September quarter due to increased spending by consumers and businesses further boosted sentiment, easing pressure from the much talked about possibility of a double dip recession for the time being.
The Indian corporate sector continues to face an earnings squeeze as margins have been falling across sectors due to rising input costs, interest rates and limited pricing.
But the current rally can best be described as a bear market relief rally since the major concerns remain alive. The rally may have partly been triggered by massive short covering and may even continue for some more time before the details of the Euro deal are properly digested by the market participants as analysts believe that it won’t be able to prevent a collapse since Europe’s fundamental problems of high sovereign debt and low growth remain unresolved.
The Indian markets may not see much of an upside since concerns with regard to inflation still occupy centre stage with latest food inflation accelerating to a six-month high of 11.43%. The official GDP target shave also been revised downwards. The Indian corporate sector continues to face an earnings squeeze as margins have been falling across sectors due to rising input costs, interest rates and limited pricing power owing to intense competition. The net profit growth for India Inc slowed dramatically, as shown by the results of about 500 companies that posted a net profit growth of just 4.4% – the worst in the past five quarters – mainly due to the fall in operating profit margins. The rupee depreciation was the key factor impacting profits since companies with foreign currency loans faced a steep hike in interest costs as well as the market to market losses.
Investors may take selective exposure in stocks available at attractive valuations with promising growth prospects that may be available across sectors such as banks, real estate, capital goods, autos and so on. At the same time, they should refrain from investing in companies with political links and those where governance is an issue. g
BY RAKESH BHARDWAJ
Tata Motors DVR
CMP Rs 110
TATA Motors’ differential voting rights (DVR) shares are currently quoting at a steep 46.6% discount to the ordinary shares of the company. DVR shareholders have a tenth of voting rights but enjoy an additional 5% dividend, compared to holders of ordinary shares. In the case of Tata Motors DVR, since its listing in December 2008, the discount on an average has been 34% and has never breached the 46% level.
If this historical trend holds, either Tata Motors’ share price will fall, or the DVR share price will rise from current levels to narrow the gap. It has happened on seven to eight occasions in the past and every time the discount has touched 46%, the DVR share price has recovered. Even if the gap has to reduce to its historical average of 34%, the DVR share price should move up by at least Rs 26 per share. The risk-reward equation is favourable, considering the fundamentals and the current valuations with very limited downside. Moreover, it is offering a good dividend yield of more than 4%.
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 email@example.com with Bhardwaj’s name in the subject line.