May 8: Whatever little support was required to sustain the bull market has come from an unexpected quarter over the last three weeks: Corporate results. I consider corporate profits as an `unexpected quarter' for the following reason: In our obsession with the government policies, the composition of the coalition and badla-encouraged trading mood, we overlooked the fact that corporate performance in 1997-98 could also play its role in furthering the bull run on the market.While I must confess that the performance of most of the companies which have announced results was expected to be positive, some of them stood out for a variety of reasons. ICICI stood out by becoming the second company in the country to report a bottomline in excess of Rs 1,000 crore at a time when observers are asking whether financial institutions can survive the economic downtrend and the accompanying financial defaults.
Reliance reported a jump in cash flow to nearly Rs 2,300 crore in what was seen by many as a turbulent year forchemicals, plastics and polyester. The other companies to report better results were Sun Pharma, NIIT, Nestle and Satyam Computer.
Even as the market was debating whether Reliance net profit would be Rs 1,500 crore or Rs 1,600 crore, the company reported a bottomline of Rs 1,653 crore, registering a 25 per cent growth over the previous financial year. It might be easy to gloss over Reliance's numbers on the grounds of a 10-plus p/e for a commodity stock. But those who do so would be missing the essential argument that Reliance expanded and commissioned most of its capacities at a time when the growth scenario in India looked bleak, markets didn't exist and the management looked stretched from the outside in view of the huge expansion.
Observers gave it very little chance of surviving the next downturn. Not without reason. When Reliance conceived the project to manufacture polypropylene, the total consumption of the material in India was around two lakh tonne per annum (tpa). Reliance commissioned 3.50lakh tpa for polypropylene. Reckless, anyone would have said. Now look at what Reliance has achieved. Today the company holds nearly 75 per cent of the domestic market for polypropylene, its competitor has not grown, and Reliance has actually contributed to the expansion of the polypropylene market in India.
To hammer the point further, Reliance is now expanding the polypropylene capacity in Jamnagar (Gujarat) that would make it the fifth largest in the world. How does this fit into our survival argument? Simple. Because of Reliance's aggressive expansion over a variety of products at a low finance cost, it has emerged not just a dominant player in India -- some may not like the word -- but one of the most competitive company in Asia.
This is the principal reason why Reliance has reported higher profits even though commodity prices have been lower than the average of the lows registered over the last 10 years. But, Reliance is not exactly the toast of our stock markets. On the contrary, the Reliancestory has not been told simply and comprehensively as a result of which the company, which has the second largest shareholding in the world, actually trails in terms of p/e among its peers like Eastman Du Pont, Formosa Plastics etc. Reliance is a reflection of what is happening across the market. Growth has gone unrecognised (software is an exception) and the positives have been grossly discounted.
Besides, the credit policy, which saw a cut in interest rates, was glossed over at first glance by the market. But I don't think that this scenario will last for long. There are a number of reasons for this.n The forthcoming budget could well answer the stock market's prayer for legalising share buyback.
A change in the government has created a new trading environment on the markets, a factor more potent than any economic turnaround. This improved trading environment will help companies gravitate towards a more fair market capitalisation. The government has already indicated that the healthof the primary market will be attended to at the earliest. The trend of promoters raising their stake through an open offer at a high price as well as takeovers will keep the stock market well stoked as opposed to a bland trading environment for the last few years. Low market capitalisation has at long last provided an opportunity for many people other than stock pickers.In India, the trend is changing from those buying stocks because prices are low to those buying companies for the same reason. As a result, a low market capitalisation is of no use to anyone. Over the last few years, managements generally shrugged off this phenomenon helplessly.
Today, they are floating buyback offers at prices considerably higher than the prevailing price of their equity. In this context, the open offer proposed by the promoters of Videocon to buy back equity at prices considerably higher than the prevailing market price must be considered as path-breaking within the Indian context. Such offers have acted aspowerful signals of the commitment of the respective managements to the value in their stock, a feature which the stock market has not overlooked. Since such announcements were made, these stocks have moved faster to their deserved levels.
The market had touched 4,400 in April 1992. Six years later, we are still around there, even though corporate growth in the interim has been robust and satisfying. It is evident that the market has failed to keep in step with industrial growth, even if you argue that the 1992 index of 4,400 was a trifle on the higher side. The present government appears to be fully seized of the dangers of a devaluation -- which is good news for the country. The entire scenario of a low general discounting has much to do with our psychological weakness with regard to our own competitiveness and achievement. With import tariffs likely to rise in the coming budget, these fears must reduce.
A corresponding strengthening of equity prices is the logical conclusion. The recent reaction ofaround 300 points on the equity markets was a welcome one. Those who doubted the authenticity of the boom are now veering round to the view that not only was the boom for real, it was also healthy. This drop, they feel, will only prop up equity prices because the technical balance of the market is stronger now than it was a fortnight ago when prices had registered a rise too sharply vertical. So, if you ask me, the answer is: the bull market is not only alive but well also.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
