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K Seshadri
Should the investor go euphoric, now that Clinton has been given the permission to lift sanctions on India and Pakistan. Well I think not. The speculative lobby has built up positions once again. But this should be no guide for the small investor.
The small investor could get easily carried away by this turbulence. And he should not blindly start believing that we are entering another bull run. A rise in select stock prices is not a bull run. He should quickly dispel away such beliefs if he is not to come to grief.
One should not make mistake the tree for a forest. Sure on Thursday the markets were electrified and the Sensex jumped up by 120 points. But if you take a closer look you will realise that the index went up because of volume purchases in some select index scrips like HLL, MTNL, BHEL and a few others.
The briskness which marked the rise in these scrips was absent in other scrips. Quite likely there has been one more bout of FII buying, but what Should the investor go euphoric, now that Clinton has been given the permission to lift sanctions on India and Pakistan. Well I think not. The speculative lobby has built up positions once again. But this should be no guide for the small investor.
The small investor could get easily carried away by this turbulence. And he should not blindly start believing that we are entering another bull run. A rise in select stock prices is not a bull run. He should quickly dispel away such beliefs if he is not to come to grief.
One should not make mistake the tree for a forest. Sure on Thursday the markets were electrified and the Sensex jumped up by 120 points. But if you take a closer look you will realise that the index went up because of volume purchases in some select index scrips like HLL, MTNL, BHEL and a few others.
The briskness which marked the rise in these scrips was absent in other scrips. Quite likely there has been one more bout of FII buying, but whatyou need to note carefully is that the buying is very selective. HLL has always been the resort of investors who looked for less risk and reasonable return. It has risen from Rs 1400 on June 26 to Rs 1710. This is a 15 percent gain in the short period.
Now compare this with the scrip price at Rs 1200 in December 1997 and Rs 1400 on June 19. That was a gain of just 17 percent over six months! Again there is one more picture, which is of loss on HLL counter! If you had bought HLL at around the peak at Rs 1690, which happened more than once in April/May period of this year by June 19 you would have lost 20 per cent of your capital at Rs 1400. You would have been wiser to invest in a fixed deposit. Yes the stock price did recover, but there is a lesson to be learnt. And the lesson is never to be in a hurry to invest. This advice is particularly called for at the current juncture.
What would have happened if you had done a similar exercise in any other weak scrip, not endowed with suchfundamentals. Currently a number of scrips are moving up; but they are moving up because the full year or quarterly results are to be announced. And in my view there is rampant insider trading. You only need to look into the volume action in days before the results are announced. Such high volumes are not likely to arise from blind gamble, but only informed buying. The current euphoria could easily disappear soon. HLL's half yearly results and dividends are likely to be discussed at a board meeting on July 31 according to information available. The current rise in volume could again be due to well informed buying!
But do not mistake that for a general market trend.
Take BHEL again. The scrip had risen up to Rs 440 by April'98 from Rs 259 in January'98. But then followed a sharp decline due to several factors including the US sanctions. The scrip went down to as low as Rs 196. It has now recovered to Rs 260. Quite likely it will reach up to Rs 340 in the near future. In this casethe lifting of the US sanctions has a direct influence on World Bank funding of power projects, which is the business field for BHEL. BHEL with a return on networth for FY 97 of around 23 per cent reached a peak price of a multiple of 22 times the earnings. Currently the net profit percentage is down and the EPS could get seriously depreciated from last year's level. And such reduction in earnings will call for a downgrade on the price earning ratio as well.
Also if the sluggishness in take off of power projects was the cause for the downturn in the immediate past, the rise in rupee exchange rate and doubts still to be cleared about foreign funding would be dampener for the immediate future. And despite that if there appears to have been a bout of investment by FIIs here; it is certainly because they are flush with funds. In the meanwhile there is some encouraging news on the industrial growth. The Indian industry registered a 4.47 per cent growth rateduring May 1998, which is below the 5.62 per cent annual growth recorded in the previous month.
The overall annual growth during April-May 1998, at 5.04 per cent, however, works out to be higher than the growth rate of 3 per cent recorded in the corresponding period of 1997-98. The quick estimates of industrial growth based on the Central Statistical Organisation's (CSO) Index of Industrial Production (based on the new revised series with 1993-94 as base year) shows that the higher overall growth during the fiscal has been witnessed in the case of `manufacturing' and `electricity' sub- sectors, carrying respective weights of 79.36 per cent and 10.17 per cent in the `general' index.
During April-May 1998, the manufacturing growth amounted to 5.18 per cent compared to 2.4 per cent in April-May 1997, while the corresponding figures for electricity stood at 9.97 per cent and 3.8 per cent respectively. The `mining' sub- sector (10.47 per cent weight),at the same time, registered a negative growth rate (-1.61 per cent) during the first two months of the current fiscal, as against 4.1 per cent in April-May 1997- 98. For May 1998 alone, the growth rates for manufacturing, electricity and mining worked out to 4.40 per cent, 9.08 per cent and -0.17 per cent respectively, compared to their May 1997 levels of 2.8 per cent, 4 per cent and 3.7 per cent respectively.
According to the `use-based' classification of the IIP, the increased overall growth has been mainly propelled by the capital goods and consumer durables industries.
These growth figures should get reflected in the corporate results for September 98. While this is encouraging it still does not give you reason to invest in a gross manner. Stock prices are going up but only selectively and with a particular logic of a growth story in the company. And you could well wait for a reaction as well.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
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This story was printed from Net Express located at http://www.expressindia.com. Net Express provides a portal to India, with news from The Indian Express and The Financial Express along with sites on travel and tourism, the entertainment industry, the power sector, the environment and much more.
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