Sucheta Dalal :And the winner is...
Sucheta Dalal

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August 8, 2005

With almost all top line companies reporting a 30 per cent increase in net profit in the April-June quarter, Corporate India shows that great results are the perfect antidote for all kinds of bad news


In May 2004 the mere anti-reform rhetoric of the Left leaders triggered a mindless 880-point intra-day fall. A year later, the biggest positive is the performance of Corporate India


Last Thursday, the capital market watchdog invited top honchos of the investment world for feedback on the blazing stock indices and to ask them what was making the Sensex race towards the 8000 mark. On Friday, the Sensex retracted from just under 7800, showing signs of a return to sanity.


Market gurus of course told SEBI Chairman M Damodaran that the relentless rally was merely a factor of great corporate results and never-ending foreign investment. Foreign investors already dominate the Indian market, and according to an HSBC research report they own 75 per cent of the floating stock. That was over a month ago. Since then foreigners have pumped another billion dollars plus into India.


Spectacular corporate results combined with a $6 billion gush of dollars (this year alone) is apparently the perfect antidote for all kinds of bad news, including high fiscal deficit, the double blow of the loss caused by Mumbai’s deluge, the fire at ONGC and the fact that India’s belligerent Left has sent economic reforms as well as public sector disinvestment into a coma.


This is in stark contrast to May 2004, when mere anti-reform rhetoric of the Left leaders triggered a mindless 880-point intra-day fall. A year later, the biggest positive is the performance of corporate India. Almost all top line companies including Information Technology and top private banks have reported an average 30 per cent increase in net profit during the June quarter, while some like Reliance Industries have turned in a spectacular 61 per cent rise. However, the bigger growth was in the second line and mid-cap companies, many of which have reported 100 per cent growth in the quarter. They include pharma, shipping, life sciences and tractor companies.


Consider a just a few examples. Among IT companies, Mastek with an 83.4 per cent increase in net profit and GMR with a 97 per cent growth in net profit, far outstripped the fancied Infosys and Wipro. Other companies that delivered spectacular results were Thermax (137 per cent), Indian Hotels (164 per cent), Century Textiles (131 per cent), Neyveli Lignite (99 per cent), Essar Steel (300 per cent) and Essar Shipping (263 per cent). This is just a rough sample of the results announced in the June quarter.


BUT it still doesn’t explain the ferocious rise in the two main stock indices, the 30 share Sensex and the 50 share Nifty. Both indices seem to be running ahead of the performance and prospects of the companies they represent. One factor that explains the renewed vigour of foreign investment in India is probably linked to India’s changed status vis-a-vis the US.


George Friedman of Stratfor, a reputed American think tank that is often described as the Private CIA, recently wrote: ‘‘For a generation, China has been the place where hot money in search of high returns was destined. It was where the action was. It is no longer that place, except in the minds of the nostalgic and delusional. But India could well be. If one thinks of China in 1980, the notion that its bureaucracy, lack of infrastructure and a culture antithetical to rapid development would yield the economic powerhouse of 2000 would have been unthinkable. It was unthinkable. India is in China’s position of 1980. It has a mind-boggling bureaucracy, poor infrastructure and a culture antithetical to rapid development. At the same time, it has the basic materials that China built on. As the Sino-U.S. relationship deteriorates, India can be a counterweight to China — not in a military sense, but in an economic sense’’.


This is certainly one explanation for the gush of foreign money into the country. However, another clear and important dimension to the over-heated capital market is the re-entry of several scamsters, who actively manipulated stock prices during the two major scandals of 1992 and 2000. It is equally well known that all of them are operating through sub-accounts of Foreign Institutional Investors (FIIs) and so long as these remain hidden behind several obfuscating layers of investment companies registered in tax havens, the regulator can do little to flush them out.


As good as the corporate results are, the large volumes and steep increase in the stock price of Syndicate Bank and Punjab National Bank, before their Initial Public Offering, despite mediocre financial performances is nothing but sheer, brazen manipulation. Another sign of an over-heated market is the impunity with which fake corporate stories and disinformation is spread through the media. Yet, the regulator seems unsure of how to get enough evidence to rip off the respectable, institutional mask of stock operators and manipulators.


After meeting market gurus, the high level committee comprising regulators and the finance ministry needs to exchange notes on how to increase transparency in the capital market.






-- Sucheta Dalal