The damage
due to external shocks can be temporary as the recovery of the economy and two
stocks demonstrate
Investors who have faith in the India Growth Story are having
the last laugh. The S&P BSE Sensex climbed up to a record high on 16
January 2020. The benchmark accumulated 2.61% in less than one-and-a-half month
since the Reserve Bank of India on 5 December cut the growth forecast to 5% for
the current fiscal during the December policy. The mainline index went up 1.24%
after the IMF on 17 December warned of significantly revising down India’s projection
of 6.1% economic expansion. The stock market barometer appreciated 8.73% following
the World Bank on 13 October tamping down the country’s GDP accumulation estimate
to 6%. The surge in frontline stocks, majorly due to buying by foreign
investors fattened on the profit from the three US indices hitting new peaks
day after day, is now percolating to the broad market. The mid-cap and small-cap
indices gained about 3.2% each in the first half of January as against the 1.3%
value addition of the headline index. The market has the ability to taste the
dish before it is ready to be eaten. It has sensed recovery even as data of
past periods were indicating a severe slowdown in investment and consumption.
The forward-looking optimism is being vindicated of late. Industrial production rebounded to the positive
zone in November 2019 after three straight months of contraction on the back of
manufacturing and mining. Freight loading of Indian Railway has increased. Transportation
of coal, iron ore and steel, cement and fertilizers is buoyant.
That the economy is
gaining traction was reaffirmed by the composite purchasing managers’ index spurting
in the month to December on strong manufacturing and services output, with the services
PMI climbing up to a five-month high. Private sector jobs
across the sectors ballooned for the 29th month in a row in December and to the
greatest extent since August. Despite headwinds, sales volumes of the residential
segment in the top eight cities expanded 1% in 2019 as affordability improved
and developers aligned themselves with the needs of home-buyers by reducing
ticket and unit sizes. New residential unit launches were up 23%. The office
market recorded its historic best year by transaction volumes. Foreign exchange
reserves jumped to a record US$ 461.16 billion at the start of 2020 and should embolden
the Union government to issue sovereign bonds to meet its commitment in
public-private funding for infrastructure. Investors staying put in Infosys
despite allegations of financial impropriety raised by whistle-blowers in H2 of
CY 2019, too, must be relieved. The stock amassed around 16% since the first of the complaints
about unethical practices surfaced on 21 October and outperformed the BSE IT
index’s gain of around 7% till the end of the first fortnight of January 2020. An
internal audit committee found no merit in the charges of inflated visa costs, improper
revenue recognition, reversal of certain provisions and non-disclosure of key
information. On top of it, the IT bellwether unveiled estimate-beating December
2019 quarter results and revised upwards its FY 2020 revenue outlook.
Bharti
Airtel illustrates how fortunes can undergo a transformation on reversal in
sentiments. The stock bounced back nearly 47% from its October 2018 low in over
14 months, with nearly half of the value coming since 27 October 2019, a day
after the apex court ruled that sales of telecom services providers should
include those from non-core activities. Telecos have to share with the
government 8% of their gross revenues as licence fee and 3-5% as spectrum usage
charge. The counter held steady even after the Supreme Court upheld its earlier
order. Its US$2-billion equity issue was subscribed three times by `quality’
qualified institutional investors despite provision of Rs 28450 crore to pay
the outstanding dues resulted in a loss of Rs 23.045 crore in the September
2019 quarter, the highest and second quarterly loss in 14 years compared with
profit of Rs 118 crore a year ago. Besides making up the deficit in payment of
statutory levies, the proceeds will be used to augment long-term resources and
strengthen the balance sheet, for servicing of short- and long-term debts,
capital expenditure and long-term working capital requirement. Two rounds of
tariff hikes, in November and December, were taken and the minimum monthly recharge
for prepaid users by Rs 10 more than a year, offering revenue visibility to
investors. What the three episodes have demonstrated is that collateral damage
due to external shocks such as shake-up in the regulatory environment cannot
last as long as the underlying foundation is strong.
-Mohan Sule
