Vol. 6- Issue 6 - Sept 2012
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MOST investors are baffled at the continued rally in the markets as concerns relating to the economy do not seem to be receding. So, the question that is uppermost in the minds of everyone is, why are the markets rallying, especially when the economy is floundering? The explanation put forth by some for this continued rally is that the downturn in the economy appears to be bottoming out, there is the Chidambaram effect that comes with high expectations of reforms and the expected release of liquidity by the European central banks, which are better known as QE3 (quantitative easing round 3). However, these explanations may not hold much water, if one looks at the fiscal mess that the economy is in, the current political scenario, and the failure of QE1 and QE2 to herald a bull run.
The only reason that appears to justify the current rally is the liquidity brought in by FIIs, for they see India as being amongst the few oases of growth, one which promises vibrancy in a scenario where other countries appear to have given up the growth path. What appears to be driving FIIs is the theory of relativity. They see more things bad in their own economies compared to India. Also, the Indian market offers the most diversified basket of stocks across sectors and corporates.
The environment, however, still remains challenging both globally as well as locally, with the upcoming US elections, issues relating to Euro zone, Middle East and rising oil prices, a slowdown in China coupled with the stalemate in Parliament on issues relating to corruption, sulking allies and no headway made on any major reforms, including diesel pricing, foreign direct investment, etc. Moreover, there is a clear slowdown in the investment cycle, with sectors like infrastructure, power and telecom probably going through the worst phase. Though the consumption side appears to be holding on, recent corporate results failed to bring any cheer and companies may, in fact, see another couple of bad quarters, especially in the next quarter.
by Rakesh Bhardwaj
Diamond Power Infrastructure
(CMP Rs 88)
DPIL is an integrated power transmission and distribution services provider and equipment manufacturer. It provides turnkey services in T&D, manufactures power cables, power and distribution transformers, T&D conductors, and transmission towers. It also undertakes EPC projects on a turnkey basis and is one of the fastest growing EPC companies in the country. The company has nine manufacturing locations at Vadodara, with more than 100 distributors across the country selling its products under the ‘Dicabs’ brand. The company has recently acquired Apex Electricals, enabling it to become one of the largest transformer companies in India. It has also acquired a strategic stake in Maktel Control & Systems Pvt Ltd, and has approved the acquisition of a 50 per cent stake in Danke Controls. In addition, massive expansion plans will see its profitability rise sharply.
With an EPS of more than Rs 31 for the trailing 12 months, the stock (which is cum-dividend with a dividend of Rs 4 already announced) is available at a PE of less than 3. A dividend yield of around 4.5 per cent with a book value of Rs 172 makes it a reasonably attractive stock despite the power sector going through some anxious times, reflecting on the somewhat poor results for the first quarter of FY13.
Inflation appears to have moderated but analysts are taking these figures with a pinch of salt and have cautioned that this may just be a one-off phenomenon, with inflation rearing its ugly head once again thwarting the hopes of a rate cut in the near future. After the Prime Minister’s Economic Advisory Council further slashed GDP growth estimates, the Government looks no way near to cutting its fiscal deficit to the targeted figure in view of the increasing subsidy burden and slowing tax and other revenues coupled with a sharp decline in exports. Net household financial savings also declined sharply during FY12 to 7.8 per cent of the GDP down from 9.3 per cent in FY11 and 12.2 per cent in FY10. This is the lowest level seen in the last two decades.
Since the Indian situation remains almost the same, the market is likely to take cues from global developments and liquidity released by European central banks. Investors are advised to go by a stock-specific approach, mainly concentrating on economy sensitive stocks due to their current low valuations and the fact that they present a twin opportunity for decent returns; one, due to re-rating and two, due to improving fundamentals, as and when the economy starts performing well. g
The author has no exposure in the stock recommended in this column. gfiles does not accept responsibility for investment decisions by readers of this column. Investment-related queries may be sent to firstname.lastname@example.org with Bhardwaj’s name in the subject line.