Vol. 6 | Issue 4|July2012
dr gs sood
Fix macro problems first
The market in the short to medium-term is likely to witness some rallies. However, these may be short-lived since the excitement over anything like easing liquidity or diminishing Euro problems may die soon due to counter-balancing forces such as deleveraging, austerity measures and so on.
by Rakesh Bhardwaj
(CMP Rs 33)
Despite the aviation sector not being out of the woods due to high fuel costs, a weak rupee and slowing demand, SpiceJet still seems to be well placed to tide over the difficult times. It has captured the number three position when it comes to market share, given the problems being faced by Kingfisher and Air India. SpiceJet has a healthier balance sheet with much less leverage compared to its listed peers and is far better-placed to use the external commercial borrowing (ECB) route to raise funds. Regular equity support from the promoters (around Rs 130 crore in October 2011 and Rs 100 crore in April this year) provided added comfort on the capital front. Its new routes in Tier 2 and Tier 3 cities, as also some international ones not frequented by other airlines coupled with permission to directly import aviation turbine fuel, will add to its operational efficiency. The sector is a strong contender for relief from the government in the form of FDI, reduction in infrastructure charges at the airports, reduction in levies on ATF, etc. Though the financial performance for the last many quarters is nothing to write home about, investors with a high-risk appetite can consider buying shares of this low-cost airline for decent gains as and when the sector turns around.
The negative sentiment will only disappear if we see moves by the government like opening up of foreign direct investment (FDI) in retail or land acquisition or other measures that may restore confidence and change sentiments. In that case, we will see foreign institutional investment (FII) inflows improve, the rupee strengthening and corporate profits becoming healthier.
However, the rally may still not sustain because India, unlike other emerging markets, has some macro problems that are difficult to fix and it is a market that is still trading at a considerable premium. Also, such moves might have to wait till the Presidential and Vice Presidential elections are over, the new incumbent in the Finance Ministry settles down and whether the emerging political equations provide room to the ruling coalition to push through key reforms.
Despite there being relief after the recent Greek elections, the markets are likely to remain on their tenterhooks due to rising yields in Spanish and Italian bonds, which may make it difficult for these two largest economies of the European region to access the markets, leading to a general risk aversion.
The other concerns on the domestic front include the possibility of below normal monsoons, an expected outflow of US$4.4 billion on account of redemption of FCCBs (Foreign Currency Convertible Bonds) during the current financial year and the drying out of other sources of financing and slowing revenue growth as indicated by the latest advance tax numbers.
The silver lining is that oil and gas prices have fallen and are at their lowest in recent times, even though the rupee depreciation has negated some of these gains. Falling gold imports are another positive for the markets.
So, looking at the situation we are currently in, investors will do well to look at the future and see how things will be six months to one year from now. As things appear now, the scenario as regards inflation and commodity prices, interest rates, currency and governance is likely to turn positive.
The market appears to have discounted most of the negatives. Thus, while a declining Index of Industrial Production leads to a knee-jerk reaction, the market is still able to weather the news of the RBI deciding not to cut interest rates and continue its upward journey.
The present market conditions are, in fact, a stock-picker’s paradise. Such a scenario presents an excellent opportunity to analyse the companies that have withstood the trying times and are being prudently run. Just go on accumulating them to reap rich rewards. g