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Nath Balakrishnan

Equities that tanked when Dr Manmohan Singh and Mr P. Chidambaram assumed office have since soared to record highs. The Budget will be closely watched for commitment to reforms.

IT WAS a year in which the opening lines of Charles Dickens' A Tale of Two Cities would have been a fitting description. Indeed, "it was the best of times, it was the worst of times". It is not often that we get to see the Sensex go past the 6,000-point mark twice in a calendar year; by the same token, a 564-point single day drop is also equally rare.

Agreed, the Sensex at the end of 2004 does not even remotely sport the kind of stellar gains registered in what was a dizzying 2003; however, the roller-coaster market movement has not been shorn of excitement either. Seen in the backdrop of events such as the Parliamentary election outcome that was contrary to expectation, an upward movement in interest rates, spiralling costs of crude, and an appreciating rupee, the markets do appear to have overcome the odds reasonably well.

The graduation of several mid-caps into large-cap status, the expansion of the mid-cap and small-cap space and a spurt in the number of FIIs interested in Indian equities are the main positive takeaways for the market. That the recovery after the dip in May has protected and built on the gains of 2003 is the tangible aspect of the story for investors.

Widening base of FIIs

When foreign institutional investors (FIIs) pumped in close to $7 billion (Rs 31,500 crore) into the equity market in 2003, it sent the key indices soaring. In what can be seen as an affirmation that India is still an attractive investment destination, fund flows from FIIs continued to be robust, as they poured in $8.2 billion (Rs 37,000 crore) in calendar 2004 (Note: this sum could also include re-invested profits).

A significant chunk of the funds was allocated to the clutch of quality equity offers in 2004. There was also a sizeable scaling up in FII trading activity.

For instance, compared to gross purchases worth Rs 90,000 crore in 2003, the value almost doubled to Rs 1,80,000 crore in 2004; gross sales for 2003 and 2004 stood at Rs 64,000 crore and Rs 1,43,000 crore respectively. The positive view that FIIs have on India is also vindicated when one looks at the number of such entities registered with the Securities and Exchange Board of India.

The number, which currently stands at 650, has risen over over 50 per cent over the past couple of years. This augurs well from a long-term perspective as FII flows become more broad-based.

Taking into account the rise in the number of FIIs and the inflows of over $15 billion over the past two years, it is clear most of the new entrants have written out cheques to buy Indian equity.

This is in contrast to the situation before 2003, when a high proportion of the 400-odd SEBI-registered FIIs remained passive or, at best, marginal investors. Several FIIs with a truly long-term perspective, such as pension and retirement funds (the foremost been CalPERS), have entered the fray; this could lead to greater stability in their investment patterns.

The mid-cap story

The bullish phase in 2003 encompassed large-cap as well as mid-cap stocks with the latter notching up more impressive gains. In contrast, 2004 belonged to stocks in the mid-cap space as they — cutting across sectors — enjoyed their fifth round of re-rating over the past three years.

Reckoned from the time the market tanked by 564 points on the Black Monday of May 17, the CNX Midcap 200 index has returned close to 80 per cent. In the same period, the Nifty returned 50 per cent.

Investment opportunities in several such stocks belonging to the mid- and small-cap categories might well be the theme for the year ahead and serve as investors' passport to riches.

In stocks such as Matrix Laboratories and Nicholas Piramal, the sheer magnitude of their movement in 2004 saw them propelled into the large-cap league. Stocks such as Vimta Labs, Sesa Goa and Mercator Lines, which recorded significant gains in 2003, continued their upward march, as if to affirm that their performance the previous year was definitely no flash in the pan.

Other notable gainers in the mid-cap space include Blue Dart, Aztec Software, Glenmark Pharmaceuticals, Pantaloon Retail, Praj Industries, Balrampur Chini and Bajaj Hindusthan.

Quality public offerings

2004 will also go down as a year when the market was witness to a spate of quality public offerings that attracted significant investor interest. The sector that dominated the IPO scene was oil and gas, with ONGC, GAIL, Petronet LNG, IBP and Indraprastha Gas lining up offerings.

The power sector, too, was not to be left behind with Power Trading Corporation and NTPC joining the IPO bandwagon.

The TCS Chairman, Mr Ratan Tata, and the MD, Mr S. Ramadorai, looking at the first quotes of TCS on the NSE. This landmark IPO was the highlight of a buoyant year for the primary market too.

ICICI Bank, Biocon and the big daddy of the IT-services market, Tata Consultancy Services, were the other prominent names that tapped the market for funds. Dishman Pharma and Indiabulls Financial Services turned out to be multi-baggers for investors.

2005 may not be as fertile when it comes to the number of offers; the IPO one could look out for would be that of mobile services major Hutchison Essar, retail chain Shoppers' Stop, private airline Jet Airways and possibly the retail businesses of the RPG Group.

Reliance Infocomm, too, could be a possible candidate to float a public offer, ownership issues notwithstanding. The Government could continue to offload 5-10 per cent in several PSUs, as it did with NTPC.

Sectors in the spotlight

The textile and pharmaceutical sectors continued to attract investor interest. With the dismantling of textile quotas with effect from January 1, 2005, Indian textile outfits are poised to benefit by grabbing a higher share of exports to developed markets such as the US. Stock market action on textile stocks was not confined to niche plays and encompassed the entire value chain ranging, from spinning and weaving at the lower end, to garments at the higher end. Raymond, Arvind Mills, Zodiac Clothing, Rajasthan Spinning, Mahavir Spinning, Vardhman Spinning and Nahar Spinning, to name a few, were the prime beneficiaries.

Riding on the back of a change in legislation that would mean India would have to respect product patents (as opposed to process patents) from January 1, 2005 and gaining from the inroads leading domestic pharma companies are making in the developed markets of the US and Europe, stocks from the pharma sector remained in good health over 2004.

Though frontline domestic companies such as Ranbaxy and Cipla have not posted spectacular returns, their outlook is positive, as opportunities from developed markets continue to inspire promise.

Among other domestic players, Sun Pharma was one of the bigger gainers, its stock almost doubling over the year. MNC pharma companies, led by the likes of Aventis Pharma, Pfizer and GlaxoSmithKline Pharma, attracted investor fancy and sported smart gains.

After having had a not-so-spectacular year in 2003, the technology sector posted a smart rebound, led from the front by bellwether Infosys Technologies. The stock has been the best performer at the market compared to its frontline peers, returning close to 50 per cent; Wipro follows, with returns of 30 per cent.

The stabilisation in billing rates after the pressure on pricing in 2003 and impressive revenue growth were the principal factors responsible for the improvement in the fortunes of key players.

Going forward, while the outlook continues to be sanguine, a key risk would be the appreciation of the rupee against the dollar and its impact on margins.

Banking was another sector that remained firmly on the investor's radar over 2004 though the sector went through a horror period when the new government assumed office in May. The losses sustained then have been recouped over the past couple of months. Unlike in 2003, when banks reported windfall gains from their investment portfolios thanks to a falling interest rate, the current year saw a sharp decline in income from the treasury portfolios given the upward bias in interest rates.

Among the large-cap banking stocks, significant gains were seen in HDFC Bank, Corporation Bank and Punjab National Bank. But the real sizzle was in some of the tier-II banks, such as Allahabad Bank, Andhra Bank, Karnataka Bank and Federal Bank. What kept the buzz alive was also the prospect of consolidation among some of the smaller banks, as size is increasingly seen as integral to being competitive.

Given the infrastructure thrust of the Dr Manmohan Singh-led Government at the Centre, it comes as no surprise that stocks belonging to the construction sector partied hard in 2004. Among the major players, Nagarjuna Constructions' stock almost trebled over the year.

The same has been the case with Hindustan Construction and Madhucon Projects. To put the performance of this sector in perspective, IVRCL Infrastructures, which has delivered an annual return of close to 130 per cent, could be perceived as a relative underperformer!

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