Breaking free

The RIL and HDFC Bank surge has drawn attention to large caps’ strategy, or lack of it,

 for growth

By Mohan Sule

Two stocks contributed hugely in helping a range-bound market break free. Sectors on the way to recovery following a normal southwest monsoon after two years of below-par rains, had hit a speed-breaker after the ban on high-value currency. Fears of a deep slump, however, proved off the mark, with even those companies reporting margins squeeze and turnover slide exuding confidence about a bounce-back in a couple of quarters. Supporting the market was buying at corrections by domestic institutions flushed with funds and in search of quality paper. A number of IPOs sailed confidently. The good response was not at the expense of liquidation of existing holdings. Besides softening of local lending rates, indications of tax cuts and spending on infrastructure by President Donald Trump were bolstering US equities to record highs, contributing to global liquidity. All these factors had combined to impart a bullish undertone to Indian stocks. What the benchmarks were missing was a shove to take them into the next orbit as most investors were busy exploring the mid- and small-cap space for quick gains, taking valuations past the earnings growth. There are sound reasons, too, for the flagging interest in large caps. Many of the index constituents are in a flux. Automobile heavyweights are grappling with rising input pressure. The risk-averse are suspicious of commodity makers due to uncertainty about the timeline for returning to health. The telecom space is in turmoil due to aggressive pricing. Global headwinds and the shift in demand composition have confounded tech services providers. Lenders are weighed by bad loans and absence of demand. Infra operators are looked at cynicism for their dependence on government orders.

The situation is paradoxical: Big and small and Indian and overseas investors continuing to be bullish on India yet finding few ideas. The Union government’s efforts to be fiscally prudent and at the same time provide stimulus are getting praise. Unfortunately, anemic creation of jobs, a function of consumption of output and services, is tamping the enthusiasm. With such a scenario, any signs of hope are looked at hungrily. HDFC Bank and Reliance Industries turned out to be the beneficiaries of the attention. No sooner did the central bank announced that foreign investment in the largest private sector bank by market value had slipped below the permissible limit, there was a scramble among this very class to climb on to the counter. India’s second largest private sector entity by market value surged after its decision to finally charge, though modestly, users of its till-recently-free mobile service as the move was considered earnings accretive. The take-off by these two heavyweights pushed the Nifty and the Sensex past their resistance. That it took these two companies, so similar but still disparate, to eject the indices from its staid orbit also tells us how sentiments and practical sense can get mixed up while making investment calls. Both have strong pedigrees that have won the trust of the market. The daring to dream big and the ability to execute grandiose plans with minimal cost had endeared the Senior Ambani to the market. The HDFC group is famous for its corporate ethics and operations run by professional managers at a time when India Inc is dominated by family-run businesses handed down from one generation to another. An appealing feature is the prudent lending at a time when peers are madly expanding their balance sheets.

Yet the bouts of fancy and neglect of the two stocks is troublesome. The cyclical boom and bust in commodities does not seem to worry RIL any longer due to its capability in maintaining refining margins above industry average. HDFC Bank is known for its relentless focus on cost-efficiency and is considered a safe play on the banking sector even when competitors are being constantly reassessed for non-performing assets and interest income. Their virtues, unfortunately, make them victims of market apathy. The stocks quickly attain rich valuations, with further growth coming at a snail’s pace. Consequently, volumes are monopolized by big-ticket investors, with trading becoming a function of spotting arbitrage opportunities. RIL slips mostly on doubts about ventures that guzzle capital, while profit-booking by foreign institutional investors opens a window for taking exposure to HDFC Bank. Despite their huge presence, institutional investors have never been heard expressing doubts about the method of deployment of cash. Companies that have hit a growth plateau recklessly use or are scared to utilize their reserves. Many practical boards in a similar situation prefer to return the idle cash rather than draw below-inflation yields or embark on adventurism that can backfire.