Business Today

How the bull came of age

Fuelled by a sustained burst of greenbacks from foreign portfolio investors, and a slow but steady increase in participation from retail investors, the stock markets have more than adequately captured the India growth story. There's no looking back now.

Virendra Verma | Print Edition: December 27, 2009

In early 2008, a bronze bull was installed at one of the entrances of the hallowed Phiroze Jeejeebhoy Towers on Dalal Street, the headquarters of the Bombay Stock Exchange. The BSE officials would have thought the timing right for such an installation. After all, the Indian stock markets were booming, and on January 10, 2008, the BSE Sensex had vaulted to an all-time high of 21,207.

The bronze bull entered Dalal Street the following day. The mood after that was anything but bullish: Days after the five-foot statue of the bull was put up, the markets came in for a vicious battering. The Sensex began dropping and, on January 21, it crashed like never before — by 1,408 points or 7.4 per cent. The slump coincided with a similar setback in global markets. The bulls within the BSE building, though, could see only one culprit: The bronze idol at the entrance. Get it out, change its position, they pleaded with the BSE authorities.

Since those heady days, the markets have witnessed a roller coaster ride, plunging to under 8,000 at the height of the global credit crisis before recovering. The bull still graces the BSE. The mood in the BSE today isn't one of overexuberance as it was a couple of years ago, but still nobody's blaming the bronze statue any more. Like the Indian markets, the brokers within the BSE have mellowed—and matured.

Indeed, if markets rise and fall today, it's largely because of cues that filter through from the West. If the Dow Jones Industrial average sneezes, the Sensex and the Nifty back home catch a cold. But the day may not be far away when the Indian economy begins influencing global markets. In the next decade, if India does become the fourth-largest economy in the world (from #13 currently), by growing its GDP at over 10 per cent annually, the country and its markets will be one of the focal points of the global investing community.

A few recent events back home — and the reaction to them overseas — are pointers to such an emerging scenario. When the Reserve Bank of India (RBI) purchased 200 tonnes of gold from the International Monetary Fund (IMF) in November, the global markets reacted. The price of the yellow metal touched a new high and treasury prices declined in the US and Europe.

Similarly, India had to import 2 million tonnes of raw sugar in 2009 due to lower output. As a result, prices of sugar and sugar companies in the developed markets shot up. Also Indian companies are now being considered as serious potential suitors for global business sell-offs. "Whenever any of our global clients announce an auction of assets or sale, they are keen to know if there are any potential buyers from India," says Manisha Girotra, CEO & Chairperson, UBS AG.

Stock Market: 2000-09
Such a scenario would have appeared like a daydreamer's castle in Spain at the beginning of the decade (and of the century). After notching a high of 6,000, the Sensex crashed to a low of 2,700 by early 2003. A securities scam perpetrated by one-time big bull Ketan Parekh coupled with the global meltdown in technology stocks brought the Indian markets to its knees.

It's from thereon, however, that a steady and gradual process of repair and reform was initiated and—looking back—has proved to be the bedrock for one of the most spectacular bull markets (that has still to run its course) that the world has ever seen. Paperless trading (or dematerialisation), a move to a rolling settlement from the earlier five-day weekly settlement, the introduction of equity derivatives and a focus on more disclosure of financial and other information to the investment community have all played their part in the Indian markets' coming of age.

If the markets have flourished, it's also happened on the back of new businesses, sectors and institution-builders. At the beginning of the decade, the list of top 10 stocks was dominated by IT, oil & gas, and fast moving consumer goods companies. Telecom, media, organised retailing, real estate and infrastructure are sectors that hardly existed a decade ago, but today dominate the market cap sweepstakes. Foreign institutional investors have poured $60 billion into Indian stocks in the past decade, and India today is one of the top 10 markets in the world by market value.

Stock Market in 2020
Since the beginning of this decade, the market cap to GDP ratio has been close to 100 per cent; this means that the value of GDP and market cap are close to each other. If one goes by this trend, then India's stock market cap would be close to $3 trillion by 2020 (from $1.25 trillion)— the same as GDP.

"With such huge growth for Indian companies India can even have a higher price-earnings (P-E) multiple also," says Manish Chokhani, Director, Enam Securities. The current P-E is 15-17 (on 2009-10 earnings), and analysts don't rule out an average P-E of 20-25 in the years ahead. That P-E expansion will be similar to that witnessed in the US markets, between 1980 and 1990, when it climbed from 12-13 to 22-25 times.

The growth in the Indian stock markets will revolve around four major investment themes: Consumption, savings, infrastructure and outsourcing services. In consumption, the biggest gainers will be the education and healthcare (hospitals and laboratories) sectors, as disposable incomes increase and literacy and health become top priorities.

"In the next 10 years, there will be companies running colleges and schools," says Arun Kejriwal, Director, KRIS Research. He expects at least 50 companies in education or related areas to be listed in the coming decade. Another sector that will benefit from more purchasing power is leisure, which encompasses entertainment segments like broadcasting, movie production, and distribution via cable or direct-to-home.

The Savings Story
Assuming the current ratio of savings is maintained— savings in India are roughly one-third of GDP—India's savings will grow to $1 trillion by 2020 from $350 billion currently. A big chunk of this money will enter newer financial products. For instance, if Indians have been traditional investors in gold and property, they now have more sophisticated options such as gold exchange traded funds and real estate funds.

Insurance will be another segment that will attract savings. Currently, there are no listed insurance companies, but that could change. Also, large financial powerhouses will be created that serve as one-stop shops for all financial products and services. "The next Fidelity or AIG will come from India in the next decade," says Chokhani.

"As Indians generate more wealth and become mature investors, a shift in saving habits is inevitable and you will see more saving habits flow into the stock markets," adds Chetan Parikh, Director, Jeetay Investments, a Mumbaibased portfolio management firm. Girotra sees that already happening as domestic institutions are playing a greater role as a counter-force to FII inflows. "The strong domestic growth and earning generation will ensure that like China, Indian markets are able to raise large funds through domestic investors," she adds.

Over the next five years, infrastructure sectors like power, port, roads and railways will together soak up investments in excess of $330 billion, of which around $260 billion will be invested in just the power sector, according to Enam Securities. More ports and airports companies will get listed, as will city management firms (like municipal corporations) and special economic zones. The fourth theme that will dominate is that of outsourcing of specialised manufacturing or services (like contract manufacturing or engineering services), thanks to the abundance of trained technical manpower in the country.

There will, of course, be stumbling blocks— terrorism and maoism, an unstable political system, and a dependence on populist measures. India's huge population could turn out to be a liability if a chunk of it continues to be unemployable (because of illiteracy). Another dampener, says Parikh, could be the capital allocation indiscipline among Indian companies. "Indian companies need to become mature enough to not overpay for their global acquisitions; only then can they become global Indian companies," adds Parikh.

In the past decade, promoters have learnt plenty of lessons—right from the perils of diversifying into unrelated areas, to making nonstrategic acquisitions, to the dangers of overleverage. The next decade will teach them new lessons. Some businesses will learn from the knocks they take, whilst others may not be that lucky. Those companies that are able to build business models with a competitive edge in sunrise sectors will be able to ride on the coat-tails of India's economic growth. These will be the companies that investors will flock to. That will take the indices to record new highs. And there will be few reasons to curse the bronze bull at the BSE.

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