Will the recovery on bourses stay?

By Oommen A. Ninan

MUMBAI, MAY 7. Bullish sentiment is again back on Indian bourses. But any sharp increase will result in another sharp fall. Investors should move cautiously by selecting only fundamentally strong scrips.

``Markets may open steady on Monday morning and improve during the day before shedding some of the gains on profit taking as some pivotals have already appreciated by 20 per cent from their low levels last week,'' said Mr. Arun Kejriwal, a leading stock analyst. Last week the Sensex recovered 15 per cent from the low of 4109 to close at 4693.88. The net outstanding position continues to be at the previous Friday level of around Rs. 1,800 crores.

The market, which opened for trading on Tuesday, after a holiday on Monday, touched a new low of 4109.66 points since June 1999. The Sensex touched the highest ever on February 14, 2000 at 6150. From the highest level to the lowest level nothing has changed in the economy or in the corporate world. But the Sensex changed by a whopping 2041 points! This also shows how fast the Sensex shot up without any change in the ground realities of the economy or the corporate world. At each fall, the market participants found some reasons; Finance Ministry's failure to intervene, fall in Nasdaq and the unimpressive fourth quarter results of some corporates.

Funds, especially foreign institutional investors, were big buyers throughout the period of weakness. According to Mr. Prateek Agrawal, Equity Analyst of SBI Capital Markets, FIIs were net buyers throughout the period. Further, their buying was not confined to any one sector. ``FII buying has injected the much required liquidity into the system,'' Mr. Agrawal added. However, the recent sharp fall on bourses created panic even amongst ``informed investors''. As exit has been denied with most stocks on lower circuit filter for several days, funds and small investors were forced to liquidate good scrips to meet commitments.

``The process of delinking Indian bourses from Nasdaq has started and certainly a positive development is taking place,'' said Mr. Kejriwal. He explained further that only two Indian companies, out of just under 5,000 are traded on the Nasdaq and ``as an Index which reflects all stocks traded became our barometer, we were heading for disaster.'' India's best performing IT company Infosys, quoted on the Nasdaq, is among the top performing foreign companies listed on the U.S. market. Mr. Kejriwal added, ``it is understandable that we look at Infosys quoted twice on Nasdaq before trading the same on the Indian bourses but to look at the all shares traded Index ``Nasdaq'' and then trade in the Indian market was ridiculous.'' All shares traded on Nasdaq are included in the computation of Nasdaq Index.

Even during the bearish phase, results from software sector and also from some cyclicals have been better than expected. Infosys, Satyam and Reliance attracted buying on better than expected results. In several of these stocks downtrend has been sharp on account of distress selling and valuations are again at attractive levels.

Mr. Agrawal also said that Indian technology companies are different as compared to those listed on the Nasdaq and other markets dominated by technology shares. Most of the companies in India have a robust revenue stream.

The number of `dotcom' companies in the Indian technology market is negligible. Besides, listed dotcoms are self financed. This is as opposed to overseas markets where the percentage of dotcoms is significantly higher and most of them are venture capital financed.

Indian software companies have been registering growth rate in the range of 80 to 100 per cent. ``Current valuations of more than 200 PE for leading Indian companies cannot be justified by this growth rate,'' opined Mr. Agrawal, adding, ``however, we expect several Indian companies to grow much faster.''

Acquisitions, of companies mainly in the U.S, in the like business and size, would drive growth rates in the financial year 2000-2001. This would happen as jobs are transferred out of the U.S. to India where wages are lower. This would sustain higher valuations of the leaders.

Companies in the service sector which are not able to register growth rates in said band and enjoy high PEs would not be able to justify such high valuations. However, product companies, with saleable products, may continue to enjoy higher valuations. Valuations in cement, automobile, aluminium, engineering and pharmaceutical sectors have also become attractive.

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