End of speedy trials

  

Absence of a trend in the current bull phase means recognition of the danger of treating events in isolation

The bulls have been flitting from metals to power T&D to construction to consumption to refineries to financial services, unlike in the past when an idea or two fueled the rally. Tech, ICE (internet, communication and entertainment), private banks, real estate and PSUs attracted attention at different points. There was an unbelievable period when the market was assigning discounting based on the promoters’ proximity to government as coal mines and telecom spectrum was being sold on a first-come-first-basis. Fortunately, the era came to an end in May 2014. There is no dearth of hot-button topics, however. Increasingly, there is a tendency to pass quick verdicts to tie up the loose ends and move on to the next explosive theme. The most controversial is the determination if the market is correctly valued, over-valued or still under-valued. Like in politics, data can be selectively mined to suit a prejudged outcome. Previously, returns in rupees and then in dollars over varying time-frames were deemed adequate to decide if more juice could be squeezed out. Now, the average of historical earnings to justify the conclusion can be as little as for three years to as long as 10 years. The period for the pace of growth in earnings and prices, too, is picked differently by different interpreters. If the parameters still do not produce the desired results, forward earnings are compared with markets near and far that might have nothing in common with the Indian economy. Drill down, and the rush for pronouncement is noticeable for sectors and stocks. A few quarters of subdued performance, and an obituary is written for the entire bouquet. The conflict over interpretation of an asset turning sour between a bank and the regulator is labelled as under-reporting. There is no patience to see if a telecom services provider struggling with debt is able to reschedule the payment timetable before rushing to declare its health beyond repair. 

The grim picture of a meltdown of tech companies creaking under outdated business model of back-office support has turned out to be far-fetched as also reports of mass layoffs, with the recovery of the main markets, the US and Europe, no longer in doubt. The real issue here is that the industry like the FMCG sector has matured. The growth in the margins will not be as voluptuous as in the past. After acting as cheer leaders for the export potential, the market is realizing that pharmaceutical producers have only a 120-day period to make profit from the generic version on expiry of patent before the gates are opened for other copycats. Banks and policy makers have repeatedly asserted that a non-performing loan does not necessarily mean a write-off. An account on the verge of default will cease to be so after the completion of a transaction that will ensure cash flow. Restructuring of debt and interest payment, change in regulatory policies, shedding off non-core assets and transformation in the marketplace can pull out a troubled enterprise. The charging for services by the disruptor and the stabilization in the churn of subscribers offer hopes for lenders of struggling telecom players. Companies have accused downgrades not taking cognizance of the effects of reorganization that are likely to be felt going ahead. In fact, the government’s economic adviser has publicly scolded international rating agencies for refusing to upgrade India despite significant improvement in the fiscal indicators.

Absence of a trend or fluctuation in the mood every few days can be a welcome development. The behavior could be taken as recognition of the importance of the value chain. Government spending on infrastructure boosts consumption as well as initiates risk-taking in the private sector. A benign tax regime favors compliance and, at the same time, reduces the government’s need to borrow from the open market and lifts pressure from interest rates. In short, events and their impact cannot be packaged in convenient boxes. Is the dollar’s appreciation due to lack of investment option or reflection of the strength of the underlying economy? Thus, the recovery of the US economy can be a cause of concern for exporters as well as relief. A power deficit spells increase in capacity utilization of generators on one hand and lack of industrial demand on the other. The fallout is frequent opportunities to enter and exit at valuations comfortable to investors. Another is the tendency to spread investable funds across sectors rather than risk concentration. The downside is the moderation in the duration and speed of gains. Instead of bench-marking against a sector or an index to gauge performance, investors would be better off fixing targets for internal returns to gain from the rally.

Mohan Sule