Revival

IS the stockmarket boom going to last? Is it the beginning of the economic upturn? Do we see, finally, light at the end of the tunnel? For every aye, there's a counter nay. India, after all, is a democracy-look what happens in Parliament every day. But after the 421-point rise in the Sensex in two weeks after Budget 99, the ayes seem to be growing louder-from finance-savvy housewives, medium-scale businessmen, the punting executives, the mid-level employees in the metros, and most certainly, the brokers on the trading floor, even the faceless market junky who till yesterday wouldn't look at the bhav copy. And from the 16 per cent who found the budget far above their expectations in a recent poll among top-level professionals.

Even the industrialists in whose hands the future of this country rests. Post-budget, many of them are smiling. And the confirmed cribbers actually sport a grimace. Says a senior corporate economist: "When I talk to the businessmen, I get the feeling that the loudness with which they used to bitch has come down." A more conservative explanation comes from Amit Mitra, secretary-general, ficci: "There's certainly what we may call a light-at-the-end-of-the-tunnel perception, even if there's not much statistical evidence. The ultimate recovery, of course, depends on the length of the tunnel. If things go right-and that includes supportive policies-we may see a bottoming out by the busy season."

At a cii national workshop on the budget last week, organised primarily to compliment finance minister Yashwant Sinha on the budget and sort out Finance Bill anomalies across the table, the bonhomie was palpable. Industry appreciated Sinha for acknowledging, though belatedly, that sentiments were important. In return, wildly happy that he's not been hauled over the coals for the income tax surcharge, Sinha exhorted businessmen: "I believe that if you could keep up the feelgood factor, then (7 per cent) growth will happen this year itself."

Already, Sinha's wish has been a command for the retail investor, who has returned to the market, much wiser. Mumbai-based software professional Anjali Vartak got in touch with her broker after almost four years. "This time," she says, "I know what not to do. Don't hunt for low-priced dark horses. Don't be too greedy. Do not hold on for notional gains-sell as soon as the stock appreciates by 15 to 20 per cent within a couple of weeks. And stick to infotech, pharmaceutical and fast-moving consumer goods (fmcg) stocks, even if they are expensive." Vartak has made Rs 7,000 on Digital Equipment and Rs 3,000 on pharma share E. Merck in less than 10 days. Now, she has done the unthinkable: she has placed an order of 100 Infosys Technologies shares at Rs 3,184 each.

Sinha needn't have any doubts about his budget upping market sentiments any more. It's here, even if economic fundamentals tell a completely different story-industrial production and exports are languishing between 3 and 4 per cent, corporate debt has touched the sky, banks aren't lending, big projects are frightfully slow off the ground, and government still eats up the bulk of the resources. Has the small-time investor, tired of gloom talk and desperate for a return of 10 per cent plus on his savings, joined ranks with the hopeful financial markets?

And hope there is aplenty. Says Ramdeo Agrawal, a director at well-known broking firm Motilal Oswal: "In three years, the market capitalisation will top Rs 1,00,000 crore. Out here, the ratio of market capitalisation to gdp is 25 per cent, while in some of the developed countries like the US, the ratio is 110 to 120 per cent.The US, which has negative savings growth, survives on the gain in market capitalisation which comes to $4 trillion to $5 trillion."

Argues Agrawal: "Look at it this way. India's gdp is almost Rs 20 lakh crore with an overall saving rate above 25 per cent of gdp. Even if 2.5 per cent of this finds its way to the market, it's almost Rs 50,000 crore. The projected bank deposit growth is estimated at Rs 1.36 lakh crore. With a cut in interest rates, part of that money could-and will-go to the mutual funds. Last year, Indians bought 800 tonnes of gold. That's over Rs 30,000 crore of unproductive assets. Even if half this amount trickles into the market, the Indian bourses are on a home run. It will be domestic money-not inflows from foreign institutional investors (fiis)-that will be the succour of our markets."

Agrees Omkar Goswami, economist and consultant with cii: "Don't expect the fiis to come in droves. Because the recession-hit East Asian countries will be dirt cheap now. India will probably be a backstop wait for them-there's less downside risk, yet less growth prospects." But after a hesitant start, fiis do seem to have joined the party, contributing Rs 430 crore post-Budget. Not just equity, even the debt segment of the market has found favour with the fiis.

There are more arguments in favour of this Sensex rally turning sustainable. It is already the longest-sustained bull run over a three-month period since 1993. This is also the first time since the securities scam that the market has rallied without any major reaction. Points out Agrawal: "The indices might have remained depressed, but even last year, several mutual funds performed exceptionally well, riding on software, fmcg and pharmaceutical stocks."

Post-budget, the same sectors are in demand, only with a much greater intensity. Better still, there is a marked increase in delivery-based buying. Net outstandings are low, indicating that investors are using cash to pick up stocks. In transnational pharmaceuticals stocks, contrary to past history, there is less speculative interest, cumulative long and short positions have reduced, even as the stock prices have appreciated by over 35 per cent. Says Agrawal: "When the stocks are selling at 40 to 80 times the earnings, attention is bound to shift towards cheaper stocks. Today there are at least 200 B group shares worth looking into. This market is just about herding towards them."

However, the trend in pharma is not reflected in banking, capital goods or even housing, where barring State Bank of India, Larsen & Toubro, Siemens, hdfc and lic Housing Finance, most buying has been speculative. There has also been a marked rise in short sales, indicating the overwhelming tendency to profiteer. Says a nationalised bank mutual fund executive: "The post-budget rally is essentially more of the same with increased activity in several key index stocks, substitution of genuine investors for speculators and a reduction in speculative bids. Still, it could be the beginning of a continued, more broad-based rally." Counters a broker: "The very fact that investors are booking profits at short and regular intervals should point to the sustainability of this rally. On expectations of the patent bill, pharma stocks had gone up. Once the bill went through smoothly, some profits were booked. Similarly, Infosys commanding a 25 per cent premium on Nasdaq will help the scrip even further."

"Despite the interest rate cuts, trading in bonds and securities are doing very well," says Amit Gupta, head of treasury marketing, hsbc Markets. "Bonds can give a return of almost 11 per cent post-tax. The cut in interest rates and crr will infuse a lot of cash into the system, which will soften the call money rate even further. I estimate an overnight call rate of not more than 7 per cent in the days to come. So why get out of bonds when the carrying costs are going to be only around 7 per cent?"

How long, then, before the optimism infects other sectors of the economy? Could be quite a wait. Says Goswami: "In India, we don't have a good sentiment indicator." The one-of-its-kind business confidence survey conducted by the National Council of Applied Economic Research doesn't come up to scratch with many experts. And the less said about government statistics, the better. Says Anil Singhvi, director, Gujarat Ambuja Cement: "The budget has been market-friendly, but only if the economy is fundamentally strong can the rally be sustained." In the US, for instance, low unemployment, consistent 4 per cent gdp growth, unabated consumer demand and a drop of long-term interest rates from 7 to 5 per cent have combined to generate a 67 per cent surge in stock prices.

Goswami offers three reasons why he feels we might just be bottoming out. One, as is reflected in the stockmarket, certain sectors show clear signs of recovery, namely fmcg, automobiles, drugs and pharma. These sectors, along with infotech and telecom, which Mitra calls the next-millennium industries, have been doing well for some time and their performance was the key that first turned the markets on. Two, basic steel, textile, capital goods, are the laggards in any growth cycle. They are the last to catch on in an upswing, and the last to come out of a downturn. Figures indicate the latter is happening now. The third reason is, of course, the optimistic agriculture growth projection, which along with good monsoons, may just provide the last push to a national demand surge.

Meanwhile, though, there could be many a slip before the bus leaves for Growthville. Says U.R. Bhat, director and chief investment officer of Jardine Fleming India Asset Management, "The budget has not dealt with how to contain the fiscal deficit, the most important parameter to judge a budget." Adds Singhvi: "In the revised deficit next year, there is going to be a bigger hole."

But, says Goswami, "The most important point about this budget is that it doesn't try to lead the economy or raise false hopes, it accepts the inevitability of a fiscal problem." Says Javed Choudhary, revenue secretary: "This budget makes a very modest total revenue projection-12 per cent, the same as the nominal gdp growth rate. In fact, experts are telling me that there's a big chance of our exceeding it."

That doesn't impress the Cassandras. Asks Narendra Nagpal, head of research, uti Securities Exchange: "There is not enough demand for even last year's inventory. Where will the 19 per cent growth in excise and customs revenues come from?" Last year, less than 40 per cent of automobiles produced were sold. Except for two-wheelers, most consumer durable products are in excess of demand. Adds Singhvi: "Refrigerators, televisions, white goods, brown goods, paints-all of them are suffering from surpluses. In one year, if you expect the stockmarkets and interest rate cuts to push consumer demand to wipe off the past inventory plus grow by over 15 per cent, it will be a miracle."

A miracle indeed, if the budget remains a one-off measure. Experts advise the government to follow up the budget with real-time action. Says Mitra: "The government must clear projects fast in housing, construction, cement, steel, highways and ports. The government must also commission a few international airports. Also, all projects of Rs 500 crore and above must financially close. If five Enron Phase Twos take off, the cement and steel scenario will change dramatically."

Grand suggestions which stand in stark contrast to the government's projection of total expenditure rising by only 12 per cent next fiscal. Says Gupta: "Even if one accounts for the lower bank rate, the lower interest will only be on incremental borrowings. That's just 30 per cent of the past costlier debt."

Experts fear that a reality check could happen sooner than expected. Says Nagpal: "Once the corporate results start coming in, the market mood might turn sombre." Even if the market continues to be bullish in April, many would book profits to avail of the 50 per cent cut in long-term capital gains tax. At 10 per cent tax, the assets created after booking profits in April will probably be the cheapest in the world. fiis especially would like to grab this opportunity. And then by May, corporate results would start coming in.

Yet, that may not be the last word. Ports and road infrastructure could just take off, cement, steel and heavy equipment may be buoyed by renewed demand, and most important, public sector disinvestment might just trigger past the global depository receipts and share-swap route. As Sinha told the cii workshop: "The government will soon take up large-scale strategic sales in the public sector. In fact, the government is not fighting shy of the word privatisation anymore." Lastly, with anywhere between Rs 500 crore and Rs 1,000 crore of fresh capital coming to Unit Trust of India, the mutual fund with a corpus of over Rs 56,000 crore might well lead the tango into the next century.

Till then, the bulls may continue to snort and the bears gravitate. We'll let the economy decide what is best for its future.

AMIT MITRA
FICCI
If five Enron Phase Twos take off, the cement and steel scenario will change dramatically.

AU.R. BHATT
Jardine Fleming
The budget hasn't dealt with how to contain the deficit, the most important parameter tojudge a budget.

OMKAR GOSWAMI
Economist
The most important point about this budget is that it accepts the inevitability of afiscal problem.

RAMDEO AGRAWAL
Motilal Oswal
Last year, Indians bought Rs 30,000 crore of gold. If half that comes in, the bourses areon a home run.

ANIL SINGHVI
Gujarat Ambuja Cements
White goods, brown goods, paints-all suffer from surpluses. It will take a miracle to hit15% growth.