It is a well managed bank with healthy financials. But after 119 years, it is valued at $3.6 b., less than half the valuation Ranbaxy, a private company, achieved in 47 years, which is less than half the time.

Okay, one may say it is in a different line of business. Fair comment. Compare ICICI Bank, with a market cap. of $ 22 b. with SBI, at $ 21b. Now SBI is no ordinary bank. It has a 200 year history and has an unbeaten record of uninterrupted dividend history for over 150 years, testimony to its financial strength and good management. With such a long history of success, why is it valued at one twentieth the value of China’s ICBC, with a market cap of over $ 450b. HDFC Bank, at $ 10.5b. is nearly 3 times PNB.

In oil and gas sector, Reliance Industries, also set up in 60s, has a valuation of $ 80 b., larger than that of ONGC, at $ 45b. even though ONGC has excellent financials. Take telecom. Bharti, an upstart, has a market value of $ 40 b. whilst MTNL, an erstwhile monopoly, is only $ 1.5b.

The reason is obvious to all but those in Government who are in denial of true facts. Government treats public sector companies as milch cows, irrespective of the fact that they have minority shareholders. ONGC is valued where it is because it has to bear a huge subsidy bill for petro products. Regrettably, most of this subsidy goes to people who don’t deserve to be subsidised, such as car owners for petrol, truck owners for diesel, the mafia who adulterate diesel with kerosene, for kerosene, and restaurants for LPG cylinders. ONGC, Oil India and GAIL pay the bill, but are still very profitable. IOC, HPCL and BPCL also pay the bill, and have been bankrupted.

There was a joke about the Chairman of a company asking his finance manager why their company’s share price was half that of their competitors when their performance and profitability was the same. A month later it had caught up, so he called in the finance manager, complimented him and asked him how he had achieved it. The manager said he had just spread a rumour…that the Chairman had resigned!

One thinks that if the Government were to resign from these companies they would be doing the companies and themselves a favour. But the disinvestment process is stuck, like a lot of other necessary and sensible reforms, in the quagmire of a failed politics.

The Government did not take the necessary and sensible decisions to hike petro product prices in line with rising oil prices, to sell companies which they have demonstrably failed to manage (look at the valuation differentials), and a whole host of other things, because of politics. The argument was that taking tough but necessary decisions would cost it votes in the next election.

Well, election time is near. Do they now think that subsidised petro product consumers are going to vote for them en masse? Why, then, have they spent Rs 200,000 crores a year subsidising them when a better targeting of subsidies to the needy would have probably cost less than a fifth of the amount?

Do they think farmers are going to vote for them when they continue to reel under inadequate financing, lack of fertiliser and unfair product pricing? Unlikely. Why, then, did they incur some Rs 100,000 crores on subsidising one bit of fertiliser, viz. urea. How much of this has gone to absentee farmers from Punjab and Haryana enjoying tax free income in Canada?

It is easy to spend money, but the spend must result in a gain in productivity. For example if a Government employs, say, 1 lac people, paying them Rs 100 to dig a hole, and another 1 lac, paying them Rs 100 to fill it, GDP will grow by Rs 2 crores without any increase in the nation’s productivity. Such spending thus results in increasing money supply, hence inflation, without increasing the economy’s ability to compete. Inflation has now hit 11%.

Not that the PM and his officials do not know all this; they have been hobbled by survival politics subjugating revival economics.

Investors know all this too, and react to it by selling shares. FIIs continued their selling last week, except on Tuesday, causing the market, which seemed to be rallying till Tuesday, to collapse. The BSE sensex ended the week at 14571, down 618 points. The NIFTY ended the week at 4347, down 170 points.

The market is at a crucial level. If it goes significantly below 14500, the sensex would then look for support at around 12,500. What are the factors that investors need to look out for.

Basically it is how domestic politics shapes up; next week there is a crucial meeting between the Government and its Left allies (is that the correct word?) over the nuclear deal with the US. There is no more time for waffling over this. If the Left continues to be obdurate and prefers to withdraw support, the 14,500 level can crack. Investors do not like political uncertainty and the withdrawal would lead to early elections. If, however, Mulayam supports the Government, it can survive and the nuclear deal can make progress. The market will rally sharply.

Added to this is the likelihood of a fall in global oil prices. A lot of the price rise in oil is now speculative with too much money chasing it. It is not a mismatch of demand and supply; in fact there are a lot of full oil tankers whose cargo cannot find buyers.

In USA consumption of petrol is likely to fall for the first time in 17 years, simply because prices of petrol have been raised. South East Asian countries like Indonesia, Thailand and Malaysia have raised prices 30-40%. They are not, perhaps, hobbled by ‘allies’ or maybe their political leaders have the necessary anatomical parts ours don’t.

So the next week is crucial. Since it involves trying to predict political behaviour it is anybody’s guess.

Source: Stark Contrasts in Creation of Value

The BSE sensex rose 474 points over the week, ending at 17,600 and the Nifty added 116 to end at 5228.

Other than DLF, Q4 PAT growth was encouraging at Reliance Communication (47%), Hindalco 49%, HDFC 40% and Corporation Bank (73%). Some more results in the next two weeks of the larger companies could enthuse investors and take the sensex up perhaps another 1000. Between now and then would be a good time to get lighter, as the next move would in all likelihood be south.

The RBI did not raise interest rates because the interbank rate is closer to the reverse repo rate so an increase would not really help suck out liquidity. The RBI Governor sees GDP growing at 8.1% this year, with a 35% gross domestic savings rate and a 36% gross domestic capital formation.

Though PAT growth has been generally encouraging, margins are under pressure by increased interest cost. According to Multi Consult P Ltd, for the quarter ended march 2008, sales of 818 companies are up 22%; interest cost up 41% and profit after tax up only 17%. This quarter shows a combination of higher interest cost and the squeeze on margins.

One concern is that, in order to combat inflation, which will become a political hot potato as elections approach, interest rates would need to be raised, sacrificing a bit of growth in the process. In areas where consumers rely on borrowing (automobiles, consumer durables, housing) this could impact demand and squeeze margins. Inflation is already at 7.57%, too high for comfort. Computation of inflation does not include several items (such as rent) which are commonly used; probably so as to contain the wages of Government employees which are linked to the official computation.

Globally, the falling interest rate cycle could be coming to an end and if the US currency weakens further, may call for a rise in rates to stanch the fall. One of the factors that can lead to a further weakening would be if other oil producing countries follow the example of Iran, which has reportedly stopped quoting for its oil in $ and uses a mix of yen and euro. Were others to follow suit, the US $ could come under greater pressure.

In the telecom sector, introduction of mobile number portability is likely to take some more time. This is the only thing that would bring in true competition for customer retention and so improve service standards. There is enough competition for customer acquisition (witness the slashing by Bharti Airtel of long distance telephony rates and roaming charges) but none for customer retention. Customers are locked into a provider because the hassle of informing contacts (and thus of losing out on some) makes them suffer inadequate service.

The Supreme Court has determined that R Comm and Tata Teleservices, which provided mobility on their fixed line networks, would be liable to pay ADC (access deficit charges) to BSNL of Rs 400 crores and Rs 300 crores respectively. R Comm claims to have already provided it in its accounts, with no impact on future profit statements. BSNL, on its part, is taking TRAI (the regulatory authority) for having phased out ADC, as it continues to provide telecom services in unviable areas, for which the ADC levy was introduced.

The Government is expected to sell big blocks of stock in 3 companies held by SUUTI, the entity that was formed to take over the assets of US 64 when it collapsed. It will start with the 27% stake in Axis Bank which is expected to be sold to various institutional bidders and fetch over Rs 9000 crores. Then will come its holding in L&T and in ITC. ITC’s stake sale could well attract the attention of BAT, which has been trying to get majority control and, with it, management control, for a long time.

With tobacco consumption declining in developed countries, BAT, Philip Morris and others are trying hard to get into developing countries like China and India, where sales are rising yet and profits are enormous. The tobacco used by foreign brands, however, is different from the variety grown in India, and tobacco farmers would find the going tough should local brands which use the local variety be phased out.

The rally can thus continue for a week or two, spurred on by more corporate results which are encouraging. One ought to use it to get lighter. There are too many imponderables for comfort at these levels. Not least being the poor fiscal health of the country and the neglect of planning for the future. Goldman Sachs says India is the worst amongst the BRIC countries in its spend on education. If only political leaders were to concentrate their minds on such matters, of planning for the future, rather than, as they do, on whether cheer leaders are needed, or whether actors should stop smoking in movies or other inane matters, it would be very welcome.

Have you read the latest Honest Truth by Ajit Dayal?

J Mulraj is a stockmarket columnist and observer of long standing. His weekly column on stockmarkets has run for over 17 years. An MBA from IIM Kolkata, he has been a member of the BSE. He is now India Representative for Institutional Investor. A keen observer of events and trends, he writes in a lucid yet readable style and takes up issues on behalf of the individual investor. Nothing pleases him more than a reader who confesses having no interest in stockmarkets yet being a reader of his columns. His other interests include reading, both fiction and non fiction, bridge, snooker and chess.