Indian stocks balk at
'psychological' barrier By
Siddharth Srivastava
NEW DELHI - Is there
a psychological barrier to the Indian Sensex
crossing the 12,000 mark? Many observers believe
so, after the Bombay Stock Exchange (BSE) 30-share
index, or Sensex, fell 368 points (more than 3%)
on Monday to 11,551 points on broad-based
persistent selling by market players. This is the
biggest intra-day fall since July 17.
The
Sensex had advanced to 11,971.60 points before the
selling pressure started. The National Stock
Exchange index, or Nifty, also dropped by more
than 3% or 105 points to end the day at
3,366.
Reliance
Energy, Tata Motors, Tata Steel and Hindalco were
the key losers at the Sensex, shedding more than
5% each. Cipla, Hindustan Lever Ltd and Gujarat
Ambuja Cements slipped by more than 4% each. The
BSE Metal Index was down 5.7% at 8,137.41. Hind
Zinc, Jindal Steel, Nalco and Tata Steel witnessed
heavy selling.
However, in continuing
fluctuations, on Wednesday the benchmark index
surged 233 points to close at 11,893. The Sensex
touched a high of 11,938 in the intra-day trade.
On Thursday, the Sensex regained the 12,000 level
in noon deals, the first time since May 18, but
finally settled below that magic figure.
Indeed, it has been a roller-coaster ride
these past few months. In May-June, the Sensex
lost close to 30% from a May 11 peak of 12,671,
wiping out US$200 billion in market capitalization
and surrendering all its gains in 2006.
At
its peak, the Indian market was worth $745
billion, nearly equivalent to the country's gross
domestic product. The sharp fall in the Sensex has
been related to fluctuations in global commodity,
currency, stock markets, US interest rates, an
already overheated market and foreign
institutional investors (FIIs) booking profits.
Rumors, broker and margin losses, the
initial-public-offering scam and panic selling
contributed to the meltdown.
However,
there was a turnaround in August. Last month, the
country's stock-market bellwether notched up 121
points to settle at a three-month high of 11,313
points on sustained FII inflows and firm Asian
advice, even as retail investors booked profits.
The recovery has been a secular one, with
shares across sectors rallying, which saw key
indices rebound by about 25% from their lows
touched in mid-June. Over the past month, the
Sensex had gained 775 points or almost 7%. It had
increased by 1,833 points, or 18%, for seven
consecutive weeks. A similar bull run happened
only once in the past, from July-end to September
2001.
Observers have attributed the
rebound mainly to strong earnings for the
April-June quarter. The quarterly earning figures
have shown that corporate India's growth story is
intact.
India's Rs500 billion ($10.8
billion) FMCG (fast moving consumer goods) sector
is on a roll. While in the longer term, fiscal
year 2002-05, the sector has grown on a
single-digit track, in the past year growth has
come back to strong double digits at about 15-16%.
FMCG major Marico Ltd posted a 42% net
profit this quarter ended June 30, and Hindustan
Lever, India's largest consumer-goods company,
reported 35% growth in Q2 net profit at Rs3.71
billion. As for the other major players, ITC Ltd,
Tata Tea, Godrej and Dabur India have also
performed well during this quarter.
Technology majors Wipro (net profit up
45%), Infosys (19%) and TCS (35%) reported good
performance, strengthening India's position as a
global software hub. Strong growth in order flows
and expansion in operating margins helped
capital-goods majors such as Bhel and L&T post
robust earnings growth.
According to
brokerage house Sharekhan, earnings of Sensex
companies grew by 22.8% on a year-on-year basis
and 6.6% quarter on quarter, compared with the
expectations of 19.1% and 3.7% growth,
respectively. While sales of the non-banking
companies jumped by 33.4% year on year, their
operating profit paced up by a slower 31.3% as
their margins fell 42 basis points to 26.2%.
"Backed by a strong volume growth and the
depreciation in the rupee, the IT [information
technology] majors positively surprised all with
their results. Upward revision in earnings
guidance by majors like Infosys and Satyam was
icing on the cake," said Sandeep Nanda, head of
research at Sharekhan. The capital-goods sector
was the second-best performer on the bourses.
Analysts have said that India is
considered attractive for investments compared
with other emerging markets, as the market is
governed by strong economic fundamentals and
robust corporate earnings.
Finance
Minister Palaniappan Chidambaram said this week
that robust growth in India will continue
indefinitely, with companies lining up investment
for expansion and setting up new facilities.
His comments followed industry growth
figures hitting a 10-year high of 12.4% in July
backed by a turnaround in the mining, electricity
and manufacturing sectors (more than
three-quarters of industrial output), which grew
more than 13%.
The elusive
12,000 However, the 12,000 mark remains
elusive at the Sensex. "Every time the Sensex
reaches the 12,000 mark, there is a resistance and
the market starts falling. I believe we are a long
way off before we see the market crossing the
12,000 mark,'' said Arun Kejriwal, director of
Kris Research Firm.
A market analyst said,
"After a sustained rising streak over the past two
months, there was bound to be some correction. The
impact on the Sensex has been more since
profit-taking was much larger in heavyweight
stocks.''
Some experts say that FII
interest in the market is likely to diminish as
the next-quarter corporate results may disappoint
the market (unlike the first quarter) because of
the rise in interest rates. Industry has not been
able to pass the increased costs to consumers. The
Reserve Bank of India hiked key interest rates in
June and July in its policy review.
This
may be true but the numbers tell a different
story, right now. According to the provisional
data available with the Nifty, on Monday when the
Sensex crashed, FIIs were net buyers. They bought
about Rs13.63 billion ($296 million) worth stocks
even as they sold Rs13.44 billion. FIIs also made
a net investment of about Rs14.91 billion.
Others say that heavy consumer debt,
dependence on foreign money, lack of productivity
gains, increasing inflation, severe budget
deficits, high energy prices, and the world's
worst trade balance and balance of payments are
all working toward creating downward pressures.
Indeed, experts are nearly unanimous that
the market does get extremely jittery once the
12,000 mark approaches because of the experience
of May-June, and it will take some time before
comfort levels are reached at this level.
"The market was looking for some reason
for a correction. The global meltdown in commodity
prices and the decline in Asian markets provided
the trigger for this Monday's correction. The
Sensex, which is close to previous highs, was also
becoming heavy at the top," said Nirmal Jain,
managing director of India Infoline.
There
have been enough warnings to potential investors.
"[With] the kind of profit booking we have
seen, it will take about 10 days or more to reach
12,000 levels. We may see some selling pressure at
current levels in the next two to three days,"
predicted Gaurang Shah of Geojit Financial
Services.
Ashu Kakkar of
SkyPowerFinancialServices.com said, "The Sensex
currently trades at a price-earning multiple of
around 20, based on its trailing 12-month June
2006 earnings. I expect profit booking and advise
caution at current levels."
Siddharth Srivastava is a New
Delhi-based journalist.
(Copyright
2006 Asia Times Online Ltd. All rights reserved.
Please contact us about sales, syndication and republishing
.)
