Sucheta Dalal :India Bull
Sucheta Dalal

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India Bull  

Sep 18, 2005

Indiabulls is attracting the attention of international capital market commentators and stock pundits. But not everyone approves of the velocity of its price surge and the speed and cost at which it is diversifying into unrelated businesses. Dr. Steve Sjuggerud, a top investment advisor asks, ‘‘What’s so great about Indiabulls that makes it worth 12 times what it was worth one year ago? The answer is NOTHING... except that Indiabulls just happens to trade on India’s stock exchange. Indiabulls is primarily a brokerage firm. It makes its money selling Indian stocks. The Indian stock market is hot, which makes Indiabulls look good. That’s one reason for the run-up in the share price. Not content with the stock market bubble in India, Indiabulls has been taking its profits and buying up Indian real estate, which is also red hot. Indiabulls recently purchased an 8-acre former textile mill — for an astounding $101 million. And this is the second one of these it has bought in just a few months. With stocks like Indiabulls as an example, the stock market in India couldn’t be hotter. And therein lies the problem...When a financial market can’t get any hotter, it can only cool down.’’ But Indian regulators are unworried. They are so focussed on the comfortable Price-Earnings multiple of the top 500 companies, that they think nothing can possibly go wrong with the Indian Bull Run.


Two markets


Part of the problem with government complacency is that the regulators are focussed on one market while most the retail players are focussed on another. Foreign Institutional Investors (FIIs) rarely look beyond the top 500 companies. That is the maximum number of scrips covered in a stock index and all the indices are happily trading at price-earnings multiples of anywhere between 14 to 16 (Nifty, Sensex, Junior Nifty or S&P CNX 500). The midcap index has a higher P/E of 19, the IT index has a P/E of 33 and many media companies have an astonishing P/E over 40. Even these don’t begin to tell the story of what is happening in some stocks that used to be in the limelight during the 1990s. Some of these are in the bottom quarter of the National Stock Exchange’s (NSE) cherry-picked 1,000 stocks, but a majority are part of BSE’s legacy of 4700-plus firms that remain listed on the bourse. Consider this: while the Sensex rose only 52%, here is a small sample of firms that rose over 1,000% from a pathetic base — Axtel Industries (up 3,000% from 40 paise), Radhe Developers (up 2,700%), Stencil Apparels and Monotona Exp (2,300%), Rathi Mercantile (2,293 per cent), SpiceJet, NEPC India, Sulzon Fibre, Shriram Overseas Finance, India Online and Stone India.


Investors beware


Smart investors must begin to prepare for the time when the music stops, the gush of foreign money begins to taper off and stock prices begin to fall to realistic levels. Pune-based investor Gajendra Singh has drawn attention to a key document — the Client Registration Application Form that each investor signs with his broker. This ‘form’ is really a bulky 50-page document in tiny print that discourages investor scrutiny. Slipped into this document are two key pages that could end up cheating investors of all their funds. On page six is an authorisation from the client to the broker (in standard format) allowing the broker to delay payments or delivery of securities beyond the period stipulated by Sebi. This is backed by a formal Power of Attorney at the end of the form allowing the broker to block the delivery of shares or payment. The letter openly attributes the need for this dubious practice on meeting the demands imposed by T+2 settlement. Gajendra Singh has written to the finance ministry and Sebi, but did not get a response. Top Sebi officials contacted by us are shocked that investors are being compelled to sign such forms and promise action. But what about stock exchanges? Haven’t their inspections ever revealed the mischief? Or are they turning a blind eye, so that there is never a problem with the smooth completion of settlements? The regulator needs to check.


Who benefits


Indian Rayon investors are furious at the new three-way merger in the Aditya Birla group. They insist that Birla Global hardly has a business worth speaking of and its price was ramped up a huge 50 per cent in the one month run-up to the merger announcement. It is a company where the Birla family stake is a massive 75 per cent. Even the Indo-Gulf (here Kumar Birla controls a 58 per cent stake) had a lower intrinsic value than Indian Rayon (where the Birla family owns a mere 28.6 per cent stake). After the merger, the Birla family stake in the merged entity immediately jumps 10 per cent to 38.7 per cent, leading directly to a large increase in his personal wealth. The finance ministry now wants Sebi to investigate insider trading. Is this a good starting point?



-- Sucheta Dalal