Business Today

Fast can't last

Real estate, financial services and infrastructure firms made hay as the sun shone on Dalal Street. But these may tumble the hardest as markets return closer to fundamentals.

Print Edition: December 16, 2007

If Bollywood productions were initial public offerings (IPOs), how would some recent releases have fared? The Shah Rukh Khan potboiler Om Shanti Om (OSO) would have doubtless been hugely oversubscribed, with investors lapping up the available shares on day one itself.

Sony Pictures and Sanjay Leela Bhansali’s labour of love, Saawariya, would have struggled to scrape through, with the underwriters and bookrunners to the issue being forced to pitch in, perhaps after slashing the offer price. Anurag Kashyap’s No Smoking would have bombed—no doubt about it — with the rate of under-subscription stretching to as high as 90 per cent; the stock would fail in its attempt to get listed, and the poor investors who did put their money into this IPO, would be clamouring for a refund.

Mercifully, the stock markets and the box office don’t run in tandem. But sometimes the performance, or non-performance, as in some cases, IPOs and film releases, begs a similar set of inferences. One, IPO over-subscription figures—and subsequent run-ups in a rising market that lifts virtually all boats—may not be the most accurate barometer of a company’s fundamentals and longterm prospects; just as copious box office collections aren’t reflective of a film’s content and substance.

Two, a successful IPO automatically doesn’t necessarily mean there’s a dynamic and scrupulous management steering the company; in a film’s case, its maker hasn’t necessarily done a bad job if the flick finds few takers. And, finally, neither a ‘hit’ IPO nor a hit movie need be path-breaking or out-of-the-box. A flop could be.

The 2007 listing of the BT 500 has some 46 new entrants. Most of these companies IPOed (a few got listed, courtesy de-mergers).

These stocks account for a little over a fourth of the total market cap of the BT 500. Two of these newly-listed companies have barged into the top 20, and eight of them figure in the BT 500.

Amazingly, six of these companies are from one sector: Real estate. Is such OSO-type mania in property companies justified? Sure, any promoter with a few hundred acres in his backyard is sitting on a goldmine, but when priceearning multiples (P/Es) begin to float in three-digit territory, you have to wonder: How much of this is backed by fundamentals (don’t look at P/Es, look at the value of the land banks, scream the cheerleaders of this sector). And how much is irrational exuberance?

Now let’s move to telecom, an industry still basking as a sunrise sector. Reflecting the growth prospects and investor appetite is wireless telephony numero uno Bharti Airtel, which has moved from #5 to #2 in two years.

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Not too far behind is Reliance Communications (R-Comm), which moves up three spots to #6 this year. Two notable entries into the BT 500 are also mobile service providers—Idea Cellular at #20 and Spice Communications at #131.

Just as in retail, what may be contributing to the rich valuations of wireless telephony companies is the presence of just a handful of listed stocks. Good for the listed ones. What doesn’t augur too well for the sector, however, is the rash of new wireless wannabes threatening to gatecrash the party.

Some 46 new promoters want to throw their hats into the ring of wireless telephony, putting in some 575 applications for licences and spectrum.

Will the party continue, with so many gatecrashers? More pertinently, what’s the big deal about being a bit player in an industry that’s dominated by two majors?

Let’s move to IT services, for long the bellwether sector on Dalal Street. Earnings growth rates of 35 per cent and net margins of 20 per cent-plus year-after-year since late ’90s ensured that this sector was the darling of investors, both foreign and domestic. Of late, however, that honeymoon is showing signs of faltering.

A sharp appreciation in the rupee has drastically altered the value equation of an industry that prided itself for its low-cost global delivery model.

A stronger rupee has shaved off some points of its chunky margins. Result? Investors are moving out of IT services stocks and putting their money in the newer sunrise sectors. That is reflected in the sagging stock prices and drops in the rankings of the premier IT services players in the BT 500.

The Tier-I giants—TCS, Infosys, Wipro—have yielded ground to newer companies; Bharti, for instance, has grabbed TCS’ #2 spot, and DLF has moved into the #5 slot, which was occupied by Wipro in last year’s BT 500.


Many of the new entrants to the BT 500 are real estate firms.
 DLF  Real estate 5
 Idea Cellular Telecom 20
 Cairn India Oil & gas 23
 Housing Dev. &  Infrastructure Real estate 54
 Indiabulls Real Estate Real estate 65
 Sobha Developers Real estate 86
 Parsvnath  Developers Real estate 88
 Omaxe  Real estate 92
 Lanco Infratech Infrastructure 107
 Dish TV India Media & entertainment 119
 Spice Communications Telecom 131
 Torrent Power Power 146
 Firstsource Solutions ITeS 148
 Akruti City Real estate 155
 Great Offshore Oil & gas 159
 MindTree Consulting  IT 175
 IVR Prime Urban Developers Real estate 183
 Info Edge (India) Internet 193
 Network 18 Fincap Media & entertainment 195
 Tanla Solutions Telecom software 199
 Global Broadcast News Media & entertainment 201
 Fortis Healthcare Healthcare 218
 Redington India IT distribution 235
 Sun Pharma Advanced Research  Drug discovery 252
 Vishal Retail Retailing 271
 Advanta India Agro-tech 274
 Development Credit Bank Banking 277
 Wire & Wireless (India) Media & entertainment 283
 Binani Cement Cement 285
 Time Technoplast Industrial packaging 311
 Zee News Media & entertainment 312
 Sundaram Finance Financial services 314
 Orbit Corp Real estate 319
 Ess Dee Aluminium Aluminium foil 320
 ICRA  Credit rating 374
 Pyramid Saimira Theatre Entertainment 382
 HTMT Global Solutions ITeS 388
 Everonn Systems Education 395
 MIC Electronics Electronics 406
 Zylog Systems IT 434
 Ahluwalia Contracts Construction 446
 House of Pearl Fashions  Apparel 470
 Meghmani Organics Chemicals 471
 Allied Digital Services IT infrastructure 488
 Nitin Fire Protection Industries safety & security 495
Moral of this story: Investor flavours are never constant. Some last longer than others, but there comes a time when they have to change. To be listed on the stock exchanges these days is lucrative.

To be listed, and to be operating in a sunrise sector (telecom, real estate, retail, infrastructure), is doubly so. But, as the IT services example reveals, the sun can’t stay up for ever on any one sector. It isn’t as if the IT story is over—far from it.

It’s just that the smart money is chasing sectors that have better stories to tell—stories embellished with faster growth rates, chunkier margins, and the promise of such healthy report cards sustaining for some more years to come.

The key question, of course, is: For how many more years can these high doubledigit growth rates and margins last?

Even a soothsayer would be hard-pressed to predict the next flavour of the market. What can be said is that in a year or two, investors will no longer be pushing up prices of stocks in sectors like real estate, or telecom, or financial services, or infrastructure.

Sure, they’re all industries whose prospects are bright over the long term. But there’s a limit to jacking up stock prices in anticipation of performances expected two and three years down the line.

At the risk of sounding alarmist, these are bubbles that have to burst. But there wouldn’t be any need to panic when they do, because such corrections will only be signalling a return to fundamentals (and sanity).

At a broader level, the market itself deserves a correction. Recent events both global and local—right from the fears of a recession in the US to a slowdown in the manufacturing sector—are ensuring that stock prices can’t keep heading northward for ever. They have to stop to pause for breath.

As every foreign guru touching down on Indian shores will tell you: India is a long-term story that’s playing out, and there will be blips in between. Rallies from such blips would be a good trigger to signal the emergence of the next flavour of the season—which could well be a sector that’s currently down in the dumps (see Going Down …).

In the years ahead, it could be fast moving consumer goods (FMCG), driven in no small measure by a boom in organised retail. Another down-and-out sector, pharma, looks set to find a huge trigger in the medium term if one of the researchdriven firms hits the jackpot in drug discovery. That’s a big if, but it also spells big returns, which could make current valuations look ridiculously muffled.

A car for Rs 1 lakh or whereabouts has the potential to change the volumes game in the automobile sector, and take it to another level. Or, who knows, it could well be a mint-new sunrise sector that climbs on to the top of the BT 500 tables.

It could be a genuinely innovative company that the market hasn’t yet recognised, or hasn’t yet been able to appreciate. To get back to the Bollywood analogy, No Smoking was a disaster at the box office, but some years down the line, out-of-the-box (office) thinking might well get its just desserts.

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