Global slowdown: Not a problem for India

By Vipin Agnihotri

In my opinion, Indian capital markets are increasingly taking their cues from global markets. Generally speaking, no sector is completely insulated from the impact of a US and global slowdown, but there are obviously few sectors that are more protected as compared to others.

According to experts, sectors such as textiles, auto ancillaries, IT and pharma, which are quite dependent on US demand, are the ones that investors have to be careful about. It has been noticed that big investors have been pulling money out of stocks that are heavily reliant on US demand. For example, IT at this moment of time is the most underweight stock in the portfolio of big investors.

Point to be noted here is that India’s domestic growth story is still quite robust, making the capital goods, consumer products, banking and financial services, infrastructure and telecom sectors great investment propositions. There are some experts who feel that the impact of the US slowdown has already been discounted in the top-tier IT and pharma companies, which are basically US-dependent.

In my opinion, IT companies such as Wipro, TCS and Infosys Technologies are trading at price-earnings (P/E) multiples of 10 to 13, on the basis of 2010 earnings, and their returns on equity (RoE) and cash flows are strong. Another intriguing thing is that global investors facing a slowdown are likely to have a reduced tendency to take the risk of investing in the Indian real estate sector. However, I am pretty sure that construction companies doing contractual work are good investments.

The pivotal factor here is that as the US slows down, investors there are bound to look at India as an attractive investment destination. Therefore, there is quite a good chance that liquidity will remain strong. ONGC, HPCL, JP Associates, GMR, L&T and NTPC can deliver returns because of their reliance on the domestic economy, which continues to be strong.

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India hikes Oil Prices while ONGC Plummets

Oil and Natural Gas Corporation (ONGC)

By Priya Nigam

So, the government has finally decided to hike petrol and diesel prices. While global oil prices have been flirting with the $100 per barrel mark, the Indian government was still on tenterhooks about the hike. Petrol prices were upped by Rs2 per litre and diesel prices were raised by Re1 per litre. While this may not be good news for you and me, the decision offers some respite to companies like Oil and Natural Gas Corporation (ONGC), which produces around 80% of the country’s crude oil.

The company missed analyst expectations when it reported its fiscal third-quarter results. Net profits had plunged 6.5% to Rs4,367 crore in the quarter ended December 31. The state-run oil major’s Chairman Mr. R.S. Sharma had cited the subsidy burden as the reason for the dismal performance. ONGC is required by the government to sell its output at a huge discount. In the December quarter, the company sold crude oil for $54.52 per barrel, which is close to half of the market rate. This discount is offered to refiners like Indian Oil Corp, Bharat Petroleum Corp and Hindustan Petroleum Corp, which are also offered government bonds to keep prices of widely consumed fuels within limits and keep inflation under control. In the latest quarter, ONGC offered Rs6,080 crore in subsidies, as compared to around Rs2,204 crore in the year-ago period.

The company is now planning to spend around Rs15,000 crore on revamping its ageing infrastructure at oilfields across the country. This is a much needed investment from the company, whose infrastructure is in a bad shape to put it mildly. There have been instances of shutdowns due to recurring leaks in the pipelines from producing wells. The reconstruction is to begin with the company’s assets in Assam, where it has three fields, of which the Rudrasagar field is almost 40 years old. ONGC expects that the revamping in Assam would take three years and, following this, it would be able to increase oil production here by 20%. After Assam, the company plans to target its fields in Gujarat and the east coast. It has become increasing important for ONGC to improve the efficiencies of its existing infrastructure, thereby recovering more and more lost production, as there haven’t been any significant new discoveries over the past decade.

What really goes in favor of the company is its overseas presence via ONGC Videsh. Production from its overseas assets is likely to rise and the company does not have to adhere to any price caps for selling this output.

ONGC’s shares have been on a downswing since the beginning of this year. The shares, which were trading above Rs1,300 in early January, have now fallen close to Rs1,000. This week ONGC shares have been volatile and even plummeted to an intraday low of Rs986 on February 20.

moneycontrol.com quoted SV Prasad, MD of the Indian operations of asset management company Schroders Plc, as expressing concern over near-term prospects, while adding that the markets are likely to remain range bound.

What's next for Stock Market?

By Vipin Agnihotri

No doubt, Bombay Stock Exchange (BSE) Sensex is making valiant attempts to decisively cross the 14,697 peak it reached on February 8 but has not been able to ever since.

In theory, the NSE Nifty, which is not a free-float index such as the Sensex, has managed to cross its previous peak. “Two large IPOs, DLF and ICICI Bank, will divert part of the funds that could otherwise have gone into the secondary market,” pointed out Rangita Chatterjee, stock market expert.

Last week, the Sensex failed to get its chin above the 14,697 bar and dropped back to end the week at 14,003, down 506 points. The biggest contributors were Reliance Industries (with 98 of those 506 points), Larsen & Toubro (47) and ITC (44). Investors are wondering which way the breakout will happen.

As far as money flow into the stock market is concerned, it has come into the notice of The India Street that Life Insurance Corporation of India is planning to invest Rs 115,000 crore in equity and corporate debt.

In addition, pension funds will be allowed to invest partly in equity. Furthermore, private sector mutual funds will get access to surplus PSU funds. “The Reserve Bank of India is releasing $5 billion of its over $200 billion forex kitty for investment in infrastructure. As India’s economy grows and the equity cult spreads, more money will keep pouring into the stock market,” pointed out N Yadav, business journalist based at India.

But experts believe that there are reasons to being cautious in the short term. First and foremost, public governance is abysmal, and getting worse as elections approach. Quite a number of times it is downright foolish as in the quest to squeeze tax resources with not a thought on how poorly those already raised are being utilized.

In my opinion, the fringe benefit tax on sweat equity is one example. Another one is the levy of a 12.3 per cent service tax on sale of tickets for international flights out of India. The result: ticketing business has gone to other countries.

“The most valuable state-owned company is ONGC, which has been headless ever since the Government refused an extension to its former chairman who made the firm hugely profitable,” pointed out Ramesh G, CEO of India research.

It is worthwhile remembering that the man nominated by an internal committee, RS Sharma, was refused the post by the Prime Minister’s Office and now, funnily, has been re-nominated! Similarly, State Bank of India, which has an unbelievable uninterrupted dividend history of over 150 years, is valued at $17 billion, less than private sector ICICI Bank and far lower than ICBC of China, which is valued at over $230 billion.

To see how the private sector extracts value, it is of utmost importance that one observes the $1 billion valuation sought to be extracted by Reliance Communication by hiving off its tower business into a separate entity.

The present stock of 110,000 towers is expected by the telecom regulator to grow to 350,000 by 2010. Reliance Communication’s valuation has shot up.

On the other hand, that of public sector Bharat Petroleum, Hindustan Petroleum and Indian Oil Corporation are languishing, because of the burden of subsidy forced upon them. Its not that these managements cannot extract value but, sadly, they are not allowed to. All in all, it’s better, therefore, to await a better opportunity to invest.