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Monday, October 22, 2007

Reality counts in stock markets

Market movements in last 2-3 weeks have been totally baffling. It appears that now, markets are not for the faint hearted. Despite weakening fundamentals, sensex has been rising like never before in any part of the globe. Fundamentals of the companies have been ignored completely and abnormal money is being pumped in to manipulate share prices. When anyone invests in capital in the business, he as to disclose the source of money. However, it is really unbelievable that billions are invested through PN, without knowing the identity of investors, it clearly proves that majority of PN money is tainted/bribed/corrupt/black money of Industrialists, Politicians, Bureaucrats and may be, even of anti-social elements. It appears that Govt. is colluding that chosen few mega industrialists to rig up the markets as all of them have vested interest. Many PSUs want to raise nearly Rs. 30,000 crs. from capital market in near future. ADAG wants to raise Rs. 10,000 crs. for a company whose main project will be operational after 5 years. Many Reliance Retail Stores have been shut. In such a situation, there is even some adverse ratings but RIL Scrip has been doubled in few months as Reliance Retail is likely to raise Rs. 20,000 cr. in near future. Mainly, share price of those companies/groups are going up who are going to raise huge money. Does anyone know when REL gave bonus issue? Does anyone remember that has Reliance Capital ever issued bonus shares? Still, such scrips are quoting at P.E. Ratio of 45-60. On the other hand, scrips like Infosys, Wipro are languising at P.E. Ratio of 20-25 although these companies reward share holders with regular shower of bonus and huge dividends.

Q2 Results of REL are disappointing as majority of the profits are from other income. Investors are being taken for a ride with latest buzzword 'De-merger or Value Unlocking'. No one is looking at profit growth. If you bifurcate 1 into 2 pieces, each piece becomes worth 5 and post bifurcation it becomes 10. Unheard of valuations are given to Retail Story, Tower Business, Power Business although, these lines require big capex, long gestation period and very low profits. At regular intervals, companies will make new announcements to give new trigger to the share prices. As on date, REL has just 1 Power Plant and distribution rights in 2-3 cities but claims that it will implement projects worth 1 lakh cr. in next few years. In how many years/decade these projects will be implemented and when these projects will break-even? and, how many projects will actually see light of the day?

Further, it has become fashion to join the herd and everyone on this planet has taken for granted that India GDP can grow at 8-10% for next 10-15 years, ignoring the further changing scenario. There may be down turn in some of the asset class. India cannot remain immune to the flux in global financial markets. Gold prices are all time high. The way ore prices are zooming, won't steel consumption be affected if, steel prices continue to rise? Inflationary pressures can prove a big dampener for the economy. Small countries like Finland, Sweden have global brands like Nokia, Atlas Copco, Ericsson etc. Does India have a single brand of global scale? Perhaps, no one is taking the risk of thinking contrarian or looking at the Reality ahead. Irrational exuberance has been transfored into madness without method.

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