In search of a theme

Post the timid listing of Facebook, no sector is emerging as a forerunner to catch investors’ fancy

By Mohan Sule

The market runs on sentiments. During every cycle, it latches on to some theme to justify the expensive valuations assigned to certain sectors and companies. Late 1990s, eyeballs rather than cash-flows were used to determine the pricing of dotcom shares. The focus was firmly on India’s back-office tech support services industry following its contribution in the smooth transition to the new century, dispelling apprehension about the global economy coming to a halt due to the Y2K scare. Subsequent to the inability of the dotcoms to live up to the hype, public sector enterprises were the next fad as the NDA government set up a divestment ministry to dispose of these entities through offer for sale or strategic sale. In 2004, the UPA government, propped up by Left parties, promptly disbanded the ministry, signally the end of the PSU story. India, meantime, was discovering mobile telephony and investors were going giddy over the market size. The beginning of the bull phase mid 2003 also triggered real estate companies’ rush to enter the capital market. Forgetting the lessons of the dotcom bust, analysts were measuring land banks to justify the pricey offerings. DLF’s mega IPO and its inclusion in the Sensex left no doubt about the obsession of the market with companies constructing residential and commercial units. Armed with their cash-chests, property developers eyed telecom, hospitality, retail, and other unrelated ventures.

After being shunned for their loose supervision and practices during the securities scam of 1992, banks, particularly in the private space, came back in fashion as they aggressively expanded their balance sheets, lending to the real estate sector on one hand and catering to the needs of the growing middle class by liberally disbursing home and consumer loans and credit cards on the other. Following the opening up the sector to private investment as well as public-private partnership, infrastructure became the flavor of the season, with Reliance Power’s IPO becoming the largest issue in the primary market till then. The going was good, with the market awashed with unprecedented liquidity due to the US Federal Reserve’s loose money policy. The Sensex crossed 21,000, sometimes surging 1,000 points in a few trading sessions. The inflow of foreign investors boosted the Indian rupee to 45 a US dollar, which was considered its fair value. The strength of the currency emboldened many Indian promoters to borrow in foreign currencies and acquire overseas targets. In the euphoria, few noticed the cracks that had started appearing. The first was the drying up of liquidity in the US and Europe as house prices crashed and financial institutions with exposure to mortgage-backed securities discovered a big hole in their balance sheets. Lehman Brothers, the fourth largest investment bank in the US, went into bankruptcy in September 2008. The scam of allotting second-generation spectrum to cronies of the telecom minister at throwaway prices has turned the sector, battered by tariff wars, unattractive. The crash in the value of the rupee offers small solace to the IT sectors, whose margin is being squeezed by the slow recovery of the US economy. Even forays into Europe was not much of help as the region is grappling with the huge debt accumulated by some members.

Real estate companies are disposing non-core assets to stay liquid and so are retailers, touted as the next big emerging sector. Banks are confronting rising bad debts and trying to shrink the balance sheet as inflation caused by rising demand for food and inflow of foreign funds forced the Reserve Bank of India to raise interest rates. The additional provisioning of capital to adhere to new global standards will contribute to the sector’s volatility. Investment in private banks is hobbled due to cap on voting rights. The power sector is still to take off due to unavailability of coal and failing health of its key consumer, the distributor, comprising mainly the state electricity boards. PSUs are facing irate foreign shareholders for subsidizing products. On the flip side, the listless market is putting off the government from pursuing an aggressive divestment program. Even large caps are not offering any solace. RIL and the government are engaged in a tussle to determine whether the falling output of gas from the company’s offshore blocks is due to miscalculation or deliberate. For a time, tech companies seemed poised for a comeback. But the post-listing performance of discount web site Groupon, business networker LinkedIn, and particularly of social interactive platform Facebook’s US$104-billion IPO last fortnight appears to have put a premature end to the story. If there is a theme at all for the market today it seems to be pizza chains. No wonder the finance minister has offered tax relief for preventive medical check-ups

Mohan Sule