Fairly valued

If equity market is the yardstick, the three years of the Modi government have been rewarding, with upside potential

While campaigning for the Lok Sabha polls, prime-minister candidate Narendra Modi would urge the audience to give him a chance after 60 years of Congress reign. Implicit in the appeal was a hint of a different style of governance and a confidence that his five-year stint will be a striking contrast against six decades of a legacy spanning post Independence to post liberalization in spite of the fact that most structural reorganizations take years to produce benefits. The electorate will of course pass its verdict at the end of the term, most probably after answering the question how better off it is compared with pre-May 2014.Nonetheless, an assessment at mid-point is useful to notice the style and substance of policy making: populist with an eye to winning the next election around the corner or thoughtfully crafted to push towards a desired aim. The ability to inspire despite short-term discomfort needs to be scrutinized to distinguish the quality of leadership. Importantly, efforts taken to implement the platform that propelled Modi to lead the nation should get the highest weight. The exercise is, however, fraught with risk. Governments are not held up or run down solely based on comparison of the track record with the earlier regimes. Often, casting of ballots is swayed by sentiments as in the trading ring.

The stock market supposedly reacts after absorbing all tangible and intangible information. The number of times an issue gets subscription is a reflection on the promoter, the business model and outlook. For the first in nearly 30 years, a political party could form government without coalition partners. After moving sideways, the market has picked up speed, mimicking the behavior of a stock that investors realize is undervalued. The momentum could be in response to some of the measures being taken to drain out a system clogged by subsidies, corruption and cronyism starting to show results. The broad market is perfectly poised: not expensive based on historical averages. For the critics, absence of a hefty premium might signal uncertainty about the government’s capability to introduce and execute reforms. The rulers might see in it validation of the actions taken. The initial hesitation and then acceptance by the market of the progress on the three promises of development, minimum-government-maximum-governance and corruption eradication seem to have stemmed from the realization that the outcome cannot be captured in a time-bound and traditional manner. For instance, the premise that the organized sector has the responsibility of job creation, ironically being propounded by those who till a few months ago were emphasizing the importance of the informal sector in the economy, is being vigorously challenged, by noting the fund disbursals by venture capitalists, private equity and Start-up India. Auctioning of government resources has eliminated the discretionary power of ministers and bureaucrats. Though not a perfect method for price discovery, it is at the moment the only practical solution to let market forces prevail. The satisfying aspect is the breaking of quid pro quo sought by influencers. Linking Aadhaar to receiving benefits including tax rebates and subsidies is a bold attempt to plug benefit leakages and the opposition to it from the privileged class has enhanced rather than diminished its indispensability.

An important metric to judge a company is the variance between guidance and performance. The rollout of GST has been missed by a quarter or so. The progress of the development agenda includes bounce-back of the foreign portfolio and direct fund inflows, stabilization of the fiscal health, softening of inflation, elimination of power deficit and expansion of the electrification program, spread of cooking gas connections, easy availability of urea for farm use, constructing highways on war footing, scrapping of the FIPB and putting FDI in most sectors on auto pilot. A government can afford to remain a benign shadow only if laws are respected. As persuasion and repeated amnesty schemes have met with lukewarm response, the DeMo treatment was necessary to change the habit. The bad-loan legacy and the tepid risk-taking by the private sector are overhangs similar to an enterprise that is seeking debt to grow and resorting to reducing weights to maintain volumes and protect the margins during challenging times. India absorbed the pain of high-value note recall just as long-term investors with faith in the management stay put during a company’s travails due to external conditions. Peer comparison, too, helps. The surge of equities in the run-up to completion of three years is understandable when there-is-no-alternative Modi is pitted against India’s entitled dynast and coalition of corrupt.

Mohan Sule

Eyes wide shut

What appears to be a winning strategy of a company can be a recipe for disaster going ahead

The reversal in the fortunes of PSU bank stocks is at once stunning and perplexing. Till the third quarter of the last calendar year, the only silver lining seen for these counters accumulating bad loans and shunned by the risk-averse investors was the increase in treasury income as bonds held in the portfolio gained value with interest rates appearing to head south. In a matter of months, the market has re-rated government-owned lenders post DeMo. The optimism seems to stems from the plentiful low-cost deposits and the increase in autonomy to recover dues. The tech sector, an anchor for the conservative investor till the better part of 2016, too, is in a flux, with a rush to cut exposure on pricing pressure and trade barriers. The return of stickiness for a theme that was untouchable or distaste for a prevalent fashion appears similar to the philosophy in politics: There are no permanent friends or enemies in the trading ring. Not that the market is unfamiliar with the cyclical sectors, moving in tandem with an economy in a growth orbit or in recession. The commodity space was known to travel in a predictable pattern of heating as producers scaled back to avoid glut and cooling as policy makers stepped in to tighten money supply to temp buying. Of late, timelines have become uncertain as irrational exuberance or depression in one corner gets imported into another. The pre- and post-September 2008 days perfectly capture the transmission of liquidity and credit crunch around the globe, upsetting the calibrated demand-supply equation. Recent events have demonstrated that even business practices can do cartwheels. Fads attracting higher valuations go out of vogue and outdated models are dusted and cited for being realistic.

Take the current obsession for small balance sheets that followed the vertical integration solution to being self-sufficient. Establishing a value chain was considered necessary to insulate from supply disruptions and input price volatility. Refiners expressed interest in oil and gas exploration, while original equipment manufacturers encouraged and sometimes even funded ancillaries. The coal scam was the offshoot of the stampede to bag mining licences for captive use or for supply to third parties. Developers were assigned discounting based on land banks, assuming prices will always go up. Yet, companies parceling out major or minor functions to outside enterprises were simultaneously being held as examples of how to be lean. The outsourcing boom that was first noticed in the FMCG space soon became a global contagion, covering a host of sectors including tech, automobiles and pharmaceuticals. The paradox of investors’ confusion is in full play in the retail sector. A pioneer of retail chain was admired for setting up outlets on leased properties in malls, where footfalls are high. A new entrant’s focus on owning properties in prime residential space with captive audience is now considered a distinguishing feature. Perhaps the changed mindset is a throwback to the dot-com boom based on traffic. The ongoing shakeup in the world of Indian e-commerce is a result of funds changing track to demand visibility of returns. The outlook on consolidation now hinges on the price tag after many thriving entities ended bankrupt after costly purchases and had to endure painfully long restructuring.

Another corporate strategy undergoing a rethink is of market share. Tech companies and FMCG companies pursuing volumes are met with exasperation despite acknowledgement that this is a desperate measure in desperate times. A leadership slot hitherto implied a steady performer. No longer as niche players are preferred for their ability to earn better margins. For example, a prudent financial services provider with asset base much smaller than India’s largest lender. Another theory that brands enjoy superior premium has been turned topsy-turvy. FMCG buyers are going back to their roots, opting for traditional healthcare solutions. Investors who cheered plans of organic growth are turning cautious due to the debt overhang. Aggressive overseas acquisitions, greeted with joy during the last bull phase, are viewed with suspicion after the misadventure of a large commodity maker eager to break into the big league and a telecom operator anxious to expand footprints. There is concern for any capital-guzzling diversification. Bagging of natural resources is not a cause of unbridled happiness as the cost-reward equation is carefully weighed. Despite examples of once vibrant entities (a renewable energy player and a fast-growing drug producer) slumping due to wrong moves or languishing sectors (of late, power and construction) back in the reckoning, investors are found to travel in herds. Perhaps a lone wolf strategy of waiting and then pouncing will not be a bad idea.

Mohan Sule

Free the prices

The massive response to book-built issues should trigger a review of the way IPOs are sold

The debut of Avenue Supermarts should remain a milestone for the primary market. Not just because it received 100 times applications or opened 100% over the offer price. Like global financial markets are viewed from the pre and post-September 2008 perspective, issuers and investors should be able to look back and reminisce those heady days, not the least for the three-digit valuations of a grocer with limited presence in the western parts of India compared with the discounting of FMCG giants such as ITC, HUL and GCPL, whose products are neatly stacked in racks lining narrow aisles. There is a new-found respect for the local kirana store that began as a hole in the wall but has enlarged by leasing or buying the neighboring storefront and expanding the basket of goods on the shelves with own money. The bottom line is the entry barriers for the business are low. The model can be replicated, venture capitalist or private equity willing. The event should be seen as a trigger for the beginning of the end of the era of multiple times subscription and listing premium. The usual practice is for intermediaries to bombard the market regulator with pleas and recommendations to revive the new issue market during a dull period. There is absence of any calls for introspection even when mediocre paper is lapped at valuations near about or higher than larger peers. The huge demand is attributed to paucity of offerings. A languishing industry is rerated if an entrant’s track record shakes off long-held views on the sector. In the noise, the basic objective to open the company for scrutiny in lieu of public support is getting lost.

Promoters come to the market to collect funds for expansion and routine operations or to retire debt. The second purpose might be to provide exit route to the initial investors who have backed the idea. The conservative issuer divests a small part of his holding, while the ambitious expands the capital by adding new shares. Some opt for a combination of two, displaying prudence mixed with confidence. To encourage diversity in choice, the capital market watchdog permits as low as 10% outstanding capital. The decision was taken when the market was in a slump at the turn of the century due to the Asian Tigers’ currency woes. One of the few industries doing well was tech, riding on the Y2K scare. These players’ requirement of funds was tiny compared with those in the manufacturing sector. Besides, overseas customers were believed to be more comfortable with services providers having presence on stock exchanges and the attendant disclosures. The low float, however, makes a mockery of price discovery. What should be done? A book-built issue should ideally be subscribed not more than 2-3 times, signaling a fair valuation, and a modest 15-20% premium, indicating guarded optimism. A 5% discount is offered to retail investors in the belief they do not have the capacity to absorb shares at the consensus price. The price band’s cap is supposed to be the pain threshold to attract risk takers. In essence, the upper range is increasingly becoming the default offer price, particularly during a bull run.

Even giving the benefit of doubt to the book runners of the grocery retailer for misjudging the response, it is now clear that the method has outlived the purpose. Small- and mid-sized entrepreneurs, the driving force of the IPO market, are reluctant to dilute 25% of the equity, the minimum required to remain on the stock exchanges, in one go. Their worry centres on the capability to match expectation and loss of control. It is also likely that they might want to come out with an FPO at improved discounting after working up a solid track record. The problem is benchmarks are not available or peer presence is sparse in emerging sectors. The outlook can either be bubbly or lukewarm. The offer for sale mode should be made mandatory for up to 10% offloading by mid and small caps. Shares are offered at a price with the maximum bids, but those quoting higher prices get preference in allotment. Speculators seeking listing gains and multiple applications will eventually fade. Cash left after expenditure deployment can be used for buyback to support prices at a future date. The Avenue Supermarts issue should be a wake-up call to Sebi to draw up fresh regulations. There is a flip side to the entire episode. Investors’ solid backing to D-Mart spells optimism about Indians’ purchasing power. Thus, the retail story is a play on India’s domestic economy just as IT was a play on India’s services exports. Also, rich valuations seem to have become the new normal. Blame it on inflation that translates into higher revenues for the same volumes or the under-penetrated market that implies high growth rates. Rarely is an IPO that is priced less than peers or 30 times trailing earnings.

Mohan Sule

Who is afraid of privacy?

Those who are using the internet to become rich and famous are attacking a medium that will eliminate fakes

The eagle captures the power and reach of the US: flying high only to swoop down on spotting its prey. China’s fire-breathing dragon, representing the fusion of an ancient civilization coming to terms with a modern world, symbolizes the huge appetite of the Middle Kingdom. The tiger is India’s national animal despite sporadic presence. The Gir lion would be an apt replacement to signify the changing times. The wish is likely to remain unfulfilled due to the outrage the suggestion will generate in certain sections of the talkative population with distaste for anything associated with Gujarat. They would rather endorse a donkey! The developed world hitherto saw us as an elephant, huge but lumbering. Of late, the image seems out of place as the same audience has changed its mind, noticing the under-penetrated markets, the frenetic rush to open business by sprucing up creaking infrastructure. Gleaming highways, cheap and speedy data transfer on internet, expanding air connectivity, rapid urbanization and humming enterprises will soon replace the idea of India as a land of snake charmers and strolling cattle jostling with two- and three-wheelers in crowded bylanes. Recent events have propelled an unexpected candidate in the fray to bag the title: the crab. A few among us are always suspicious of any new challenge to transform India. They smell a conspiracy by the bureaucracy to become more intrusive. Not only the government but even the private sector has been at the receiving end from proponents of ‘neutrality’. Ironically, Sebi is chastised for any move to allow market forces to have a say and the RBI is implored to intervene on any tinkering by banks with the prices of services. The battering of RIL instead of the system that was responsible for its rise captures the inherent contradiction of vigilantes striving for an economy free of blemishes.

A campaign was launched to discredit the oil-to-textiles conglomerate despite the promoter sowing the equity cult in India and enriching many, many people in the bargain. Dhirubhai Ambani’s fault was to disturb the status quo of the permit raj. Another recent example was Facebook’s aborted attempt to offer free access to its web site by tying up with a services provider. Internet warriors sprang up in protest. Not surprisingly, the fiercest criticism emanated from start-ups who feared being left out. Services providers buckled under the assault by those who led charmed lives, fattened on private equity. In the process those aspiring Indians who would have upgraded to smart-phones turned out to be the losers. That the experiment was ahead of its time has been demonstrated by the massive response to Reliance Jio’s freebies. The collateral damage of the failure to build a narrative to counter the zealous guards of the internet gateway has proved costly to the existing services providers struggling to match the largesse. Huge debt and falling subscribers are triggering consolidation and leaving surfers less choice, a situation that could have been avoided were the Facebook-Reliance Communications and Flipkart-Airtel marketing gimmick permitted with checks and balances. Fortunately, the government seems to have learnt its lessons. It has stood firm as professional nitpickers tried to sabotage its flagship Jan Dhan scheme, pointing to the absence of deposits and operating costs, ignoring that the zero-balance accounts are specifically to receive subsidies. The gradual comfort with the banking system is to embolden the beneficiaries to wean away from informal lenders.

The important role of the program was subsequently in play during the DeMo execution, another initiative that was savagely attacked. Much time was uselessly expended in calculating how long it would take to revert back to the bad, old ways. Fears of recession have proved off the mark as the impact was limited even in the period of the implementation, as per the results of Corporate India. Those mocking the inability of the government to unearth black money were found enumerating the benefits of cash. With the shoot-and-scoot strategy of the naysayers unhinging, the focus has now shifted to conjuring scary scenarios of how widening the usage of Aadhar is going to turn India into an Orwellian surveillance land. The preoccupation is with the misuse of the finger-print-and-iris data. Even conceding that that no system is fail-proof, safeguards can be put in place as per the evolving situation. The takeover code had to undergo frequent revisions to make it fair to all the stakeholders. Preventing insider trading is not easy in spite of repeated tightening of regulations. Despite our saving, investing, spending, reading, viewing, surfing and talking habits leaving a trail, embracing of the digital mode is increasing. Therefore, demonizing a medium to weed out fakes is counterproductive in the absence of an effective alternative.

Mohan Sule

A grocer’s day out

The huge subscription and listing premium of a brick-and-mortar retailer’s IPO raises concerns 

The bumper subscription and the super-duper listing of Avenue Supermarts is not the first nor will it be the last of how-an-underdog-triumphed kind of story in the primary market. There have been illustrious predecessors and many more are sure to break the record. What the anticipation of the issue, the excitement of blocking funds to subscribe, the nervous wait to get allotment and the thrill of seeing the shares in the demat account do is to validate certain theories and raise troubling questions about IPO investing. The first is the confirmation that there will always be appetite for quality paper. In a bullish market, even mediocre offerings find buyers but not all get more than 100 times subscription. Some are first among equals. A sound business model attracts investors even in times of domestic (worry of demonetization hurting the economy) and global (President Donald Trump’s ability to execute his tax-cut agenda) uncertainties. The promoters in this case are known to run a tight ship, keeping costs down. The aim is not to be a one-stop shop like some of its struggling brick-and-mortar and digital peers. Second, the proportion of the bottom line in relation to the top line is important. Though smaller in revenues compared with the listed competitors, the supermarket’s profit to turnover ratio is far superior. The closest comparison can be with HDFC Bank, whose portfolio is smaller than SBI’s but is more valuable than India’s largest lender by assets. Third, primary and secondary markets can feed on each other rather than gouging each other. The days of an imminent mega offering or bunching of entrants leading to fear of under-subscription seem to be fading as unmet demand chases subsequent opportunities. A hearty response to one can spill over to the others in the queue.

Proportionate allotment encourages the entire family to participate. Many resort to borrowing. The more the applicants, higher are the chances of a crackling show. A strong post-listing performance emboldens investors to take risks. Profit-booking is diverted into debutants lined up. The unlucky ones go back to stocks that have corrected, ensuring continuing buoyancy. Thus, the virtuous cycle keeps turning. The euphoria of investors in getting a chance to part-take in the success of the D-Mart chain is not without concerns. The suspicion is that the stock was under-priced (the offer price translates into FY 2017 P/E of 33, considered modest in today's times for a company growing 40% every year despite limited presence and its peers with fragile health getting near-about or higher discounting), resulting in a mad scramble to get on board. Whether the price range was fixed on the insistence of the issuer or on the advice of the investment bankers and was in synchronization with the results during the running of the book merit an examination by the regulator.The size of the issue could have been enlarged by expanding capital rather than divesting 10% stake. Those who have bagged the shares and do not plan to exit in the short term must surely be feeling short-changed by the enviable differential in the secondary market. The pre-issue hype clouded the fact that the proceedings (Rs 1870 crore) were to retire the Rs 1900-crore debt on the balance sheet. Some of the cash left after deleveraging could have been used for capital expenditure or even buyback. A smaller equity base benefits EPS but also points to lack of confidence in the pace of growth going ahead.

There are two potential dangers. Opening up FDI in multi-retail and threat from e-commerce as internet penetration catches up with rural prosperity. Avenue Supermarts does not have any online presence. Till recently, it was fashionable to be asset-light (Future Retail) over owning real estate (D-Mart).There are doubts about the sustainability of squeezing FMCG companies to get finer prices. At current valuations, the offline grocer is more expensive than many of the large producers of goods on its shelves. It is like HP getting better discounting than Intel. The model seems similar to Reliance Jio's disruption in the telecom space by out-pricing rivals. Thus, the market seems to not mind the thin slice (the average net profit margins of the last three fiscals of 3.5% are comparable with global giant Walmart, which stocks brands at rock-bottom prices and pays employees minimum wages, but better than those of the domestic players), a break from the preference for fat margins over volumes. As a thumb rule, mega subscription and listing premium signal the peak of the market. The bust following Reliance Power’s high-profile entry in January 2008, riding on the bull market, is still remembered despite attribution of the fiasco to global heating and the ensuing liquidity crunch. The experience of investors in some IPOs that opened at more than 100% premium is not inspiring. India’s richest man had to bail out an entrepreneur-driven venture, whose shares had doubled on listing early 2007. The company, meanwhile, went on to accumulate debt of Rs 1400 crore and the promoter walked out of the office empty-handed seven years later.

Mohan Sule

Moody or sensible?

The market does not seem to apply a uniform yardstick to judge companies by governance track record and growth potential

By Mohan Sule

As if the mixed signals emanating from domestic and global economies were not confusing enough, the market’s fancy towards companies without any common grounds is confounding investors further. The issue is if precedence should be given to track record of capital appreciation and payouts or transparency in operations while making investment calls. Seasoned investors might point out that the two cannot be separated. Companies based on sound business model are able to make money ethically and judiciously utilize their cash. Yet this is not always observed in the trading ring. It is understandable that companies in the same industry get different discounting based on their governance and growth qualities. Not all players in the FMCG and tech sectors, generally known for their clean balance sheets, are treated alike by the market. When Satyam Computer Services formed one of the quartets of the sought-after IT stocks and there was not much to differentiate between them except for their marketing efforts in bagging million-dollar clients, Infosys and TCS led the pack. In hindsight, there appeared to be better comfort level with the body language of NRN Murthy, Aziz Premji and N Chandrasekaran rather than Ramalinga Raju, who was often seen with politicians. Eventually, the market’s judgement proved correct when the account fudging explosion extinguished Satyam in 2009. At times, even the canniest of investors can be fooled by glib management speak and carefully orchestrated coverage of bosses in the business press. The insider trading scandal was a huge blow to HUL but not an existential crisis largely due to its robust product portfolio.

If companies in sectors depending on openness as a prerequisite to surviving and prospering because of the nature of their revenue streams and the profile of their major investors are subject to discrimination, those whose earnings are dependent on order flows from sources requiring intense lobbying and are prone to fluctuate with changes in regulations should be, going by the logic, treated with circumspection by the market. Commodity producers’ prosperity is mainly linked to licences and construction players to orders from government. Till recently, spectrum was awarded on a first-come-first basis and the telecom space was invaded by real estate developers, cement makers, private sector lenders, steel producers and oil explorers and refiners just like coal mines were sought not for captive use but for to gain from scarcity. Despite the stench of wheeling-dealing, big-ticket investors did not and are not likely to shun these sectors. The reason for their interest is the same for the rush among entrepreneurs and established groups’ foray: to capitalize on the potential. In fact, institutional presence has enabled the small investors to separate those with staying power from fly-by-night operators and given them courage to take exposure to rewarding but extremely risky plays. Real estate players traded on the stock exchanges are looked at with interest due to the discipline listing brings in spite of operating in an industry known as a recipient and conduit of unaccounted wealth. The dispersed shareholding and professional managers of L&T have attracted large domestic and overseas funds despite its presence in an industry dependent on PSU contracts.

The preference for companies with dispersed shareholding compared with those with major promoter control is seen in the better discounting enjoyed by Infosys, where all the original promoters have stepped aside in favour of outside managers, in comparison with Wipro, where the promoter has given a key position to his son. In contrast, investors seem to prefer automobile makers run by a dominant shareholder. The Japanese owners of Maruti Suzuki India have installed their own team at vantage points. Almost all sought-after two-wheeler makers are controlled by families. The premium pricing varies only to the degree of market share and growth plans. The same story is repeated in the pharmaceutical sector that was till liberalization dominated by MNCs, enjoying huge valuations even though operating under Fera. The situation has reversed and promoter-driven local drug makers are chased for making cheap generics for the developed markets. The uncertainty about regulatory overhang scares ordinary investors but not institutional investors. An extension of the investment story can be found in the RIL stock. It escapes from getting trapped in the commodity cycle because of economics of scale, ending sacrificing growth for stability. When in a position to eject from the predictable orbit on to the growth trajectory on the back of the cellular business, it was, ironically, the rush of institutional investors despite the tight grip on ownership and opaqueness that boosted the scrip.

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.