Are Indian Stocks Getting Too Far Ahead of the Pack?

Indian stocks continued their strong run last week as the BSE Sensex touched an all-time high of 17,361.50. Sensex, Bombay Stock Exchange’s benchmark index which consists of 30 companies, is up about 25% year-to-date.

Not all US listed Indian stocks have benefited by the strong run in the Indian markets. If you look at the chart in the previous article you will see that the strong performers have been the Indian Banks, HDFC Bank (HDB) and ICICI Bank (IBN) and the Indian ETF (INP). The newly listed Sterlite (SLT) has also performed well. However, IT, Outsourcing and Internet stocks have all under-performed.

But is the Indian Market getting ahead of itself?

Linked is a statement issued by Indian Finance Minister P. Chidambaram on Friday, as he told investors “to do their homework” before investing in the domestic share market that has raced to new highs on the back of overseas fund flows. This after the BSE Sensex set new highs on eight successive trading days. So far, overseas funds have invested $11.63 billion dollars in Indian equities this year, compared $4.86 billion dollars they pumped in during the same period last year.

Optimism is running high in India and further gains are expected. Why not? The Indian Economy is in a great shape and continues to roll out amazing GDP growth rates. Indian Banks have almost no exposure to the sub-prime mortgage mess and their stock prices reflect that. However, the strong rupee is a concern

Indian markets will react based on how the global market react in the next coming weeks and months. Even if the global markets remains strong, I think there might still be a room for a small correction before it makes new highs. But any downside in the US (which I am expecting for a while now but just doesn’t seem to happen) could cause a major breakdown in India. We are already aware that Indian markets react strongly both ways and with such a long stretch of upside there might be a little downside coming soon.

Comments

[URSTOCKPICKER:]

Himanshu,

You may be right, you may be wrong, But one thing is clear...
The institutions are buying these stocks with a fury. They know more than you and me.

2007 Oct 02 02:19 PM

[Deepak Shenoy:]

The Sensex has a trailing 12 month PE of 23.5. Earnings season is just starting so at current levels PE will come down. Why will earnings increase? Most of the non-IT pack based Sensex companies (Reliance, Bharti, Tata Steel) have foreign loans (either as ECBs or FCCBs) which are rupee adjusted every quarter, and the dollar is down about 2-3% from last quarter (Note: in Q1 - Apr-Jun - the dollar was down 5-7% adn resulted in humongous forex gains as other income) Top level IT companies are hedged (at least for hte last quarter) and will probably squeeze their earnings through.

Natural growth, hedged and other forex gains look like they will override the lackluster performance by auto, and the losses incurred by the public sector oil marketing companies.

With the rapid increase in oil prices, refineries are bound to make a killing if they (like the larger ones in India) process heavy crude. Estimates are that margins will be higher than $15 a barrel for hte quarter.

Yet, this is all going irrational, because looking one year ahead or two isn't quite that great. IT companies hedge themselves for like one or two quarters, that's it. Forex gains are other income, but there is a slowdown in the growth of operating income, evident last quarter. High interest rates are affecting interest rate sensitives, though we're easily ignoring that for all the banks.

Furthermore everyone thinks there's no "subprime" problem in India. But hear this piece: Since there's no credit quality checking method in India, all home loans are granted on the basis of paychecks and bank statements. A large part of these loans are taken by people who buy from builders before the house is constructed, a phase that can take three-four years. (Most such houses have been delayed, in my knowledge)

Indian tax laws do not allow tax deductions for principal repaid BEFORE the house is complete, so what do the banks do? Offer "pre-EMI" - meaning pay only interest until the house is complete and when you get possession, start paying back the principal.

These are ARMs but what resets in general is the tenure of the loan, not the payment, so everyone is happy. Until the tenure becomes unmanageably huge, so they have to raise the monthly payment.

Interest only loans, with a potential spike in payments required, and high interest rates prevailing...sound familiar?

If the dollar keeps going downwards, IT employees aren't going to get the huge increments they're used to. Asset prices here (which are typically 5-10x annual salaries) are already slowing down and flippers are starting to find their shoes. Some of the top banks have indicated higher default rates on housing loans; and rates are currently 12% or higher.

I think we'll be hit, except we'll only know after the event. But for now, enjoy the run - nothing better than to watch as your portfolio multiplies itself.

2007 Oct 02 04:28 PM

[brij srivas...:]

The mantra is..........weak INR is good for india i.e a stronger $.....We have been fed on this premise since independence.I am not looking outside towards the US,but,am looking inward as to how our policy makers chisel out the rupee.My fingers are crossed,Mr Pandya.

2007 Oct 06 01:29 AM