The market rewards the bold by boosting their
valuations but extracts a price from those found trying to undercut investors
Risk-taking is back. The Nifty spurted
2.5% on the day Moody’s Investor Service pulled down India to the lowest
investment-grade, while maintaining a negative outlook, and the manufacturing
purchasing managers’ index in May,
when industries were allowed to partially resume operations, stood slightly
above the reading in April, when India was in a complete lockdown. The
benchmark reacted to the dismal composite and services indices by gaining
1%. Finally, the market is looking
ahead. Rating agencies predicting
chilling estimates of negative growth in the current fiscal year have conceded
pick-up of buying impulse from the second half.
Going beyond projecting a full-blown recovery, they are forecasting a
high single-digit sprint in the next fiscal year. The two US injections totaling
US$ 2.7 trillion and the Federal Reserve’s assertion of keeping the cost of
money close to zero and buying bonds till necessary have emboldened investors.
The gradual opening up of economies around the globe since the beginning of the
month has provided justification for taking exposure to risky assets in the
emerging economies. Foreign portfolio investors net pumped in nearly Rs 21000
crore into equities in May along with the first week of June, after dumping up
to Rs 69000 crore of stocks in March and April. Significantly, some Indian
companies never lost hope even when infections and death toll were increasing
and economic activity had come to a halt. Reliance Industries collected almost
Rs 98000 crore from a bunch of quality investors in seven weeks till 7 June, a
period when most of the developed world was shut. On top of it, the mega Rs
53125-crore rights issue got a commitment of 1.6 times. In the process, the
stock appreciated 14% since 22 April, when the first of the big investments, Rs
43570 crore by Facebook for about 10% stake in the digital arm, came in. The
market was up 9.6% in the period.
Spunky rival Bharti Airtel, too, outperformed, spiraling 31%
as against the Nifty’s 25% recovery in 10 weeks from the 23 March low. The
latest quarter results indicate that the worst might be over for the
over-regulated and over-stretched sector. Operating profit grew over half and
the margins expanded 171%. The average revenue per user jumped a quarter. Mobile data
traffic increased two-thirds. Parent Bharti Telecom took the opportunity to shed
2.75% stake within four days of the peak price to mop up more than Rs 8433
crore from long-only and hedge funds and sovereign wealth funds to completely
wipe out its debt. The market’s
appetite, however, is restricted to easily digestible fare. Despite loose
monetary policies of the US and the EU and the Reserve Bank of India reducing
the lending rate 75 basis points to 4.4% on 27 March
and resolving on 17 April to undertake targeted lending of Rs 1 lakh crore,
Tata Motors early May had to recall its Rs 1000-crore debt issue as the
participants demanded a higher coupon than the 8.8% offered by the automobile
manufacturer facing a rough ride due to Brexit and slowdown in India and
China. A fortnight earlier, Fitch Ratings had downgraded its defaulter
rating to B from BB-, with a negative outlook.
Hint of
a buyback a week before the country went into a prolonged shutdown propelled
Praj Industries 7% in a single day. The engineering services provider
eventually decided to call off the proposal, blaming weak market conditions.
The stock added 26% in the 11 weeks since then. The underlying message to the
bio-fuel systems builder is to conserve cash, which is half of what it was a
year ago, and boost valuations from operations rather than take the easy way
out of extinguishing shares to bolster EPS. Another company that the market is
no mood to let slip away by taking advantage of low prices is Vedanta. The stock amassed close to 15% in roughly
three weeks compared with the Nifty’s 8% increase since disclosing on 13 May the
intention to delist and despite India Rating downgrading the stock to AA- from
AA, with a negative outlook, on expectation of high balance-sheet leverage in
FY 2021 and FY 2022. The non-promoter shareholders, owning 49% equity, look
determined to force the miner to buy back the shares through reverse
book-building at a much higher price than the floor of Rs 87.5, a 17% discount
to the current level. The move makes sense as the Nifty Metal index is turning
the corner, climbing up 19% in the period, on the expected recovery in the US
and Chinese economies. The carrot and stick strategy to reward performance and punish
sloth, it seems, is never going to be out of fashion.
-Mohan Sule
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