Indian stock markets: Absolute madness
Tuesday, November 11, 2008
China announced stimulus package- Indian stock markets crossed 10,000 levels. Lupin announced good news-stock fell. Sensex and Nifty rose on Friday-FIIs and MFs are net sellers on Friday-who are buyers on Friday and why are they buying? Volumes are falling-stocks are rising. When international rating agencies are aggressively downgrading GDP estimates, Indian stocks are moving upwards. When exports fell for the first time in 5 years, exports stocks are making gains. When textile sector is expected to cut 7 lakh jobs, textile stocks are gaining. Speculators are enjoying free ride and share markets became gambling centres in the last 2 days. Absolute madness! Will this madness continue?
India’s GDP growth estimates:
India’s GDP growth rate is at 9% in the last financial year. See how things are changing!
1. Morgan Stanley: GDP growth rate for FY09 to 7% from 7.5% and for FY10 to 5.7% from 6.5%.
2. Goldman Sachs: GDP growth rate for FY09 to 6.7% from 7.5% and for FY10 to 5.8% from 7%. Massive downgrade.
3. Fitch Ratings: GDP growth rate for FY09 to 6.3% from 7.8% and for FY10 to 6% from 6.8%.
4. Prime Minister's Economic Advisory Council: GDP growth rate for FY09 to 7% from 7.7%.
5. RBI: GDP growth rate for FY09 to 7.5-8%.
What is the significance of these GDP growth cuts?
Indian stock markets now became the most expensive ones and are now trading at a P/E of 12.4 while most stock markets are now trading at a P/E of below 10. India’s GDP growth is still very high when compared to developed economies, but current valuations are not sustainable. If rupee continues to strengthen, we will see slowdown in FII exits. If dollar regains its strength, Indian stock markets will further correct by 25-30%. No one is ruling out further downgrades in the GDP estimates by rating agencies. I expected 7% GDP growth in this financial year but economy seems to be falling more steeply than I expected.
India will be further downgraded after the collapse of real estate and job markets. Bullish investors may not like my comments but you will see the real scenario by January, 2009. India cannot take aggressive fund rising decisions like disinvestments in PSUs due to Assembly elections. Banking sector will face rough weather in 2009 due to gross rise in NPAs. It is safe to go short on ICICI Bank.
According to CRISIL, credit growth is growing despite drastic slowdown in economy means bad loans. India's federal and state fiscal deficit is likely to top 7% of GDP, One of the highest in the world. The official target for India's federal government fiscal deficit is at 2.5% of GDP. Is there any room for stimulus package as commented by Commerce Minister? What will happen to Indian fiscal deficit if Governments spends aggressively without accumulating funds by disinvestment which is an impossible one in election year? What will happen if commodities bounce back due to China stimulus package?
Shocking news: Deutsche Bank analyst gave price target of zero for General Motors. According to the analyst, it is a sure candidate for bankruptcy. According to the auto analyst, Obama’s bailout package may not save this company. GM shares are now trading at 63-year low.
Stock Market statements:
1. Stock markets will fall by another 20-25% due to further worsening of economy- Nouriel Roubini, a New York University business professor. Negative growth will continue till the end of 2009.
Economic statistics:
1. US Budget deficit will touch $1,000 billion in 2009. We have to see how Barack Obama will stimulate American economy with such a huge deficit.
2. NASSCOM: Fresh hiring will fall to 2 lakh in IT and BPO sector in this year (2.6 lakh in the last year) and salary hike will fall to 2.5% in the next year. Why does NASSCOM change its numbers so frequently?
3. Auto sector growth in this financial year is 5.6%. It is 12% in the last year.
4. IT: Indian companies are cutting their IT spends by 30%. Domestic IT market will grow by 15% in this year Vs 25% in the last year.
5. 15% decline in Indian exports in October and this fall will continue in the next few months.
Indian Stock market news:
Positive triggers:
1. CRAMS stocks like Divis Labs will benefit due to Obama’s emphasis on healthcare.
Negative triggers:
3. LG Balakrishnan layoff employees of Bangalore unit.
4. Exports: India announced first declines in exports in 5 years.
Global recession news:
1. Retail: the No. 2 U.S. consumer electronics retailer, Circuit City stores filed for chapter 11 bankruptcy. This is really shocking news because of upcoming holiday shopping season. It indicates the lack of hope over the purchasing power of consumers. Subhiksha deferred expansion plans while Reliance retail restructured its plans. Indian FMCG companies reported 50% growth in festival season.
2. Insurance: AIG posted $24 billion loss in Q3. American Government increased AIG bailout to $150 billion. How long will they prolong?
3. Steel: JSW Steel asked 1,600 people to take unpaid leave.
4. IT: Nortel removed 10% of its workforce in 2008 with the recent sacking of 1,300 employees. Nortel announced $3.4 billion loss in this quarter. Google stock fell to lowest levels in three years.
5. Logistics: DHL cut 9,500 jobs as it discontinued US domestic operations.
6. Finance: 70,000 jobs will be lost in Banking and Financial sectors across the world.
Quarterly results analysis:
1. Usher Agro: Excellent results. Company reported 85% rise in sales and 110% increase in net profit.
2. Aishwarya Telecom: Good results. Company reported 120% increase in sales and 45% rise in sales.
Decent performance: Titan Bio-tech and Haldyn Glass.
Poor results: Kinetic Engineering, Gremach Infra, Country Club India (worst performance), JPT Securities, Alchemist, Asit C Mehta Financial Services (worst performance)and Sterling Holiday Resorts.
Good articles:
1. About American mortgage crisis (thanks to the reader).
2. Everything about current economic crisis.
Bet on China: Companies who are dependent on China for their business growth will be rerated positively in the coming days. Mining companies will benefit to some extent but no significant impact on other companies. China announced further subsidies for high-tech and service industries. Click here to read more about China stimulus package.
Final verdict: It is very difficult to predict short term moments in our gambling centres (stock markets). But don’t underestimate the drastic slowdown across all sectors and its impact on Jobs and the consumption power. India will feel the heat of NPAs in 2009 only. If you are buying at current levels, you are making a big mistake. Investors should wait for some more time to buy even good companies. This is a pure trader's market.
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5 comments:
Hi Krishna, I like your title "Absolute Madness" :)
In fact, I do get frustrated at times when the markets are expected to go down (based on common sense, global trends, and the economic red flags), but the markets keep climbing for some reason.
But I'd rather sulk now and invest later (at the right time), than invest now and sulk later ;)
Now is a good time to keep researching for what to buy when the opportunity comes. Also, not all stocks have risen from their fall. One idea might be to have around 20-25 good stocks on your watchlist and keep an eye on their CMP comparing it with their 52week low. And when the opportunity presents itself, invest! Till then, be patient.
A nice read:
http://economictimes.indiatimes.com/quickiearticleshow/3698270.cms
i agree with your view of not buying stocks in current market becasue its purely traders market and we will have to fall from our heights because GDP for india 2009 expected is 7-7.5% and will further fall more in year 2010. so prepare with your list and buy slowly and small lots will make a good portfolio for long term.
Regards
Amar
i will for sure buy XL telecom & energy becasue under is the reason to buy such a great share (morgan stanley have incresed stake to 9.8% in this company ) FII's are selling but few are griping future emerging stocks
XL Telecom & Energy Ltd. (XLTEL) (Code: 532788) (Rs.68.90) has produced excellent Q1FY09 (June – September 2008) results posting 150% higher net15 profit of Rs.15 cr.
Incorporated in 1985, XLTEL, formerly XL Telecom, is a Hyderabad based company that operates through two divisions: Telecom and Energy. In December 2006, it came out with an IPO of 39,50,000 shares of Rs.10 each at Rs150 per share aggregating Rs.59 cr. for expansion.
Its manufacturing facilities at Hyderabad in Andhra Pradesh and Nanded in Maharashtra have annual installed capacities of 500,000 units of cable jointing kits, 2,880 of SMPS plants, 65 MW solar modules, 3 million CDMA phones, and 150,000 litres of ethanol per day.
XLTEL used to derive almost 80% sales from Telecom products and the balance 20% from its Energy Division, which comprises two segments – Ethanol and Solar Photovoltaic Systems (SPV). This has drastically come down to just 1.5% from 44% in FY08 (June-end) due to high margin concentration in the energy business.
XLTEL has set up a 120 MW solar photovoltaic cell manufacturing plant in the Rajiv Gandhi Nano Technology Park SEZ at a cost of Rs.360 cr., which is scheduled to commence its operations soon.
It recently raised $40 million (Rs.160 cr.) through a FCCB issue to part fund the above project. The FCCBs are convertible after one year but before 5 years post issue. The balance funding of Rs.200 cr. is being financed by a Term Loan from IDBI at 11% p.a.
It has a 3-year exclusive distribution agreement with Forta Im Ex SL, Italy to deliver a minimum of 3 MW solar modules per annum to Europe and collaborations with Alfa Laval, Axesstel, Corning and Kyocera Wireless.
During FY08 (June end), XLTEL posted 24% higher sales of Rs.650 cr. and earned 99% higher net profit of Rs.40 cr. yielding an EPS of Rs.21.4.
During Q1FY09, sales have further gone up by 70% to Rs.257 cr. and net profit up by 150% to Rs.15 cr. This net profit of Rs.15 cr. is arrived at after the notional provision of Rs.5.5 cr. towards foreign exchange fluctuation.
The company’s equity capital is Rs.18.8 cr. and with reserves of Rs.269 cr., the book value of its share works out to Rs.154. The promoters hold 61% in the equity capital, foreign holding is 29.4%, institutions hold 4.4%, PCBs hold 1.5% leaving 3.7% with the investing public.
XLTEL is looking at establishing series of Solar Farms in Italy, southern France and other European countries generating about 300 MW over 3 years.
The first of its solar farm has been established in Majorca, Spain, with an installed capacity of 1.6 MW at a capital outlay of Euro 9.5 millions (Rs.62.7 cr.). The company has submitted bids for three tenders to supply solar energy equipment worth Rs.640 cr. in Europe.
XLTEL has received TUV Certification for quality assurance from Germany that will act as a major catalyst for exports to Europe.
The company has signed a Power Purchase Agreement (PPA) for 25 years with a Spanish utility company. The project is expected to generate about Euro 19 million in revenues over its initial life with almost negligible maintenance costs.
It has signed a 5-year contract with LDK under which, LDK Solar will deliver approximately 300 MW of multi-crystalline silicon solar wafers to XLTEL over a 5-year period, commencing in Q1FY09 and extending through 2013.
Looking at the growing global demand for Non-Conventional Energy Power Generation in the global market place, XLTEL, as a part of its strategy to be a serious player, has decided to embark on forward integration in the solar value chain by entering the EPC segment of solar farm establishment and into power generation using Solar Technologies.
Globally, the solar photovoltaic market is estimated at $16 billion and is expected to touch $65 billion by 2012, which provides ample opportunity for the growth of XLTEL.
XLTEL is likely to achieve sales of Rs.1000 cr. for FY09 June year end. Net profit is likely to go up by 50% to Rs.60 cr., which would give an EPS of Rs.32.
At the CMP of Rs.68.90, the share is trading at a P/E of just 2.1 on its estimated EPS of Rs.32 for FY09 and offers potential for further gain of about 40% in the medium-term. The 52-week high/ low of the share has been Rs.595/58.
Hi Krishna,
Were you able to figure out the reason for the fall of India Glycols. The Stock has fallen very badly and the last qtr result is also very poor. I remember you recomending this stock when it was Rs. 200+ and CMP is 60+ !
Hi Dr. Krishna,
I recently came across your blog when I was surfing. Since then I have become yor fan. You give really valuable thoughts on stocks.
Even this article is must read for all those who invest in share markets.
I am also thinking why people are still investing in market.The market hasn't yet acquired its real value(around 7000).
Please keep writing in the same way
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