Business Today

Does Narendra Modi love equity markets?

The PM's previous track record may not be in his favour. As Gujarat CM, he took steps that burdened the PSUs, leading to stocks of Gujarat-based firms taking a beating.

twitter-logoMahesh Nayak | September 16, 2014 | Updated 11:37 IST
PM Narendra Modi
PM Narendra Modi (Photo: Reuters)

In 2008 when ING had sent Manish Bhandari for an eight-day study trip to Beijing and Shanghai, he was amazed to see a 10 to 15 km, eight-lane flyover cutting through residential houses going from one end of the city to another. Says Bhandari, Founder of Vallum Capital: "The Chinese government was very clear that they wanted development, and today I see this happening with the Modi government coming to power. The focus of this government is development."

It's not just Bhandari, but the entire equity markets believe that the agenda of the government is development, one of the key reasons that the BSE Sensex has been trading at an all-time high. Since the new government came to power on May 16, 2014, the market barometer has climbed 13 per cent.

There is no doubt about Modi's profound love for development. When he was the chief minister of Gujarat, a Japanese delegation, including media, met India Inc. leaders and looked at the development work done by him in the state. The result was Japan's commitment to invest $33.5 billion in infrastructure projects in India.

But does Modi love equity markets too? His previous track record may not be in his favour. In 2008, when he was Gujarat's CM, he levied a 30 per cent tax before profit on state-run companies as part of corporate social responsibility (CSR) for carrying out welfare activity in the state. Again in January 2013, he added an additional burden on state-run companies to dole out more funds to promote innovations.
The result: the stocks of Gujarat-based PSU companies have taken a massive beating. In 2008, for instance, after the state government levied the 30 per cent tax before profit, the stock of Gujarat Narmada Valley Fertilizers & Chemicals Ltd (GNFC) crashed from Rs 120 to Rs 48 in one month. Even after six years, the GNFC stock is still trading at Rs 100 per share. The stocks of Gujarat Alkalies and Chemicals Ltd, Gujarat State Petronet, and Gujarat State Fertilizers & Chemicals Ltd have suffered similar fate.

Says Gautam Trivedi, Managing Director at Religare Capital Markets: "The question to be asked is have Gujarat-based companies done good? The answer is they have done well. Second, Modi will not shoot himself in the foot when he has a huge disinvestment program lined-up." Adds Bhandari, who feels that the government will support state-run companies and give the managers a free hand to operate: "In fact, I see lot of action among state-run companies. Modi will not like his name to be associated with beleaguered [companies] and therefore the only choice left for them (state-run companies) is to improve or perish."

The disinvestment process has already begun and that is seen as a huge positive among market players. This would be the largest disinvestment program by the government. Earlier, the largest amount raised by the government through disinvestment was Rs 39,000 crore in 2007/08. The government now has plans to raise Rs 64,000 crore by March 2015.

Says Trivedi: "It's ambitious, but this time round the government has started its disinvestment process much earlier, unlike in the previous years when it used to start in the last quarter of every fiscal. Though there are concerns whether there is [enough] appetite in the market to absorb such quantum of paper."

The biggest positive for the Indian markets is the foreign institutional investor (FII) inflows. So far, FIIs have invested $14 billion in Indian equities.

India, in fact, has been the recipient of highest foreign flows compared to any other Asian market, including Japan. Unlike the previous bull market of 2007 where all five cylinders - retail, mutual fund , insurance, FIIs and private equity funds - had fired, this time round it's just the FIIs. "Election result was a huge game changer for India, which is getting re-rated. Huge global money [is] being allocated to India," says Trivedi, adding: "This bull still has legs and everyone will get attracted to the Indian market as going ahead, growth will drive the market. The government just has to stick to its plan of development."

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