The Hindu Business Line : Sensex at 10K: Strength beyond numbers

SENSEX 10,000, Nifty 3000. As the indices crossed these milestones, investors had much to cheer about. For the Sensex, 10,000 has been a long-coveted number. At this level, had you owned the Sensex basket for the past 25 years, the annual returns would have been a tidy 20 per cent. If it manages a similar return over the next 25 years, the Sensex will come face-to-face with the six-figure mark. But it is likely to take longer, as annual returns of about 15 per cent seem more likely.

It is fitting that this mark should be reached in the best bull market India has ever had. The Sensex also breached 10,000 at a time when investors worldwide are viewing India as an emerging economic powerhouse. They have been rushing in in a big way, driving the bull market since April 2003. Foreign Institutional Investors have invested $27 billion over the past three years; the economy has also received massive investments in the unlisted space.

In the current bull run, the Sensex galloped from about 2,800 to 10K in less than three years. And the gains are not confined to equity prices. Several aspects of the market show signs of vitality that will be significant from a longer-term perspective and have a crucial influence on the market beyond 10,000.

Market depth: Never has the equity market had the depth it does today. This is undoubtedly the big story. Every bull market till now was shallow, even when the fundamentals were good.

Even when a swathe of stocks recorded fancy price increases, there was always the feeling that the investment options were not exactly aplenty. And when the bull market ended, the list of stocks would shrink dramatically. That is not so now. There has been a significant increase in the number of quality stocks. Even if there is a strong corrective phase or a slowdown in the economy, this is likely to remain intact, even improve, for the following reasons:

The 100-large-cap space: The likes of Container Corporation, Great Eastern Shipping, Pantaloon Retail, Sesa Goa, IDFC and MICO are a few examples of how the bull market has catapulted a host of stocks into the large-cap territory.

Close to 100 stocks now have a market capitalisation of over Rs 4,000 crore. Not so long ago, there were stocks with a market cap of less than Rs 1,000 crore even in the Nifty and the Sensex. Now, the Junior Nifty too has only two such stocks — CMC and IFCI.

Even Asian Paints, Zee Telefilms, Ashok Leyland, Siemens and Hindustan Petroleum, to name a few, have been replaced by the companies such as TCS, Bharti Tele and NTPC in the Sensex now. This, too, is an indicator of depth in the large-cap space.

The 50-plus stocks that have made the large-cap grade in this bull market are sound companies that can get bigger; as they do so, there could be substantial wealth creation over the long term. The availability of more large-cap stocks will make the market more attractive to the FIIs and mutual funds.

Mid-cap kicker: The dominant theme in the march to 10K were not the Nifty or the Sensex stocks, but the mid-caps. Manifold gains have been the norm in this space and a host of such stocks appear poised for robust growth. This widens the investment options. A buoyant economy provided a firm underpinning to mid-cap companies. So much so that they can now withstand any slowdown in the economy.

In the past, investors would turn away from most such stocks when the underlying fundamentals weakened. A subtle shift could have happened now. As economic growth prospects are perceived to be bright, there is better earnings visibility and investors may take a long-term view. Institutional investors have started to broadbase their choices. There is increasing coverage by research outfits of mid- and small-cap stocks and price declines may be used as an investment opportunity.

Till a couple of years ago, the FIIs confined themselves to large-caps; the few that ventured into the mid-cap territory kept their exposures at modest levels. The FIIs have now invested in more than 750 stocks, and in several mid-cap plays they have holdings of over 20 per cent. Mutual funds have been early entrants.

Institutional investors are likely to raise their exposure in such stocks over the long term, as it is the mid-caps that will provide a kicker to the returns. The quality of the mid-cap stocks points to a regular supply to large-cap category over the long term, and this process is likely to increase the depth of the market.

A lifeline: The Sensex at 10,000 also comes as a boon to several business groups, which were generally avoided by investors. They have got a fresh lease of life quite unexpectedly.

The liquidity-driven rally led investors to such stocks once the high-quality plays went out of reach. Investors have bought into these companies despite concerns over their corporate practices.

If the promoters view this as an opportunity and tone up corporate governance, it will help retain the rich gains in market cap, provide a valuable source of funds for growth and broadbase the universe of quality stocks.

For example, Bharti Tele-Ventures. In the 1990s, in its earlier avatar as Bharti Telecom, it had no big reputation for shareholder-friendly practices.

But over the past four years, the company has transformed itself beyond recognition and now enjoys investor fancy with high levels of transparency.

Quality IPOs: Every bull market till the ongoing one acquired notoriety for the large number of IPOs by companies with dubious credentials. This had a damaging effect on investor confidence. But the story has been different over the past three years.

Poor quality IPOs have been the exception. At least 95 per cent of the offers have been by companies with sound fundamentals. A few — Jet Airways, Jagran Prakashan and Piramyd Retail — may have been pegged at expensive valuation levels, a trend evident especially over the past year.

There is, however, no doubting the quality of business on offer. Close to 100 IPOs have deepened the market in the same way as the emergence of new sectors and the renewed fancy for sectors shunned by investors (see Box) have.

Institutional investor provide depth: Just as the robust economy has provided the perfect support to rising equity values, a more-than-twofold rise in the number of FIIs investing in India has complemented the expansion in market depth. Some 900 FIIs are now registered with SEBI.

The new entrants have invested aggressively and this has played no mean role in bolstering FII flows to record levels in each of the past three years. No longer is the market vulnerable to the actions of a few FIIs.

This was the case for much of the 1990s. Institutional investor participation has also never had the depth that prevails now. That FIIs are coming from several regions and have been investing at different times augurs well for the market.

Investment styles: A larger number of quality stocks and institutional investors means there will be room for various investment styles in building a diversified portfolio. Sector-specific funds have a greater chance of success now. This will be a major plus over the long term, as it has the potential to deepen the market.

Sectors, new and revived

RETAIL, entertainment/multiplexes, financial services, print media, telecom and airlines — these are sectors that have come to the fore as several privately-held companies seek funds, visibility and valuation that a listed status provides. This has widened the choice for investors.

Telecom is still a nascent story in the listed space, with only Bharti Tele-Ventures and Tata Teleservices listed. It may, however, provide several large-cap stocks over the next couple of years, as IPOs are imminent from Reliance Infocomm, Hutch, Idea and BSNL.

Construction, too, is practically a new option though there were quite a few listed companies. Stocks in this sector were viewed with suspicion and rarely participated in earlier bull runs. This sector has been re-rated by investors and, for the first time, their price earnings multiples have moved broken out of the single-digit territory. Along with engineering and sugar, construction has been at the vanguard of the bull market.

The flow of stocks from new sectors provides investors with more options in building a diversified portfolio. This, too, is likely to make India an attractive option for FIIs

Back in fancy: Sectors such as sugar, textiles, chemicals, fertilisers and metals, especially steel, hardly held investor fancy for close to a decade now. Even in earlier bull runs, their made but short sprints. Aided by buoyancy in the economy and commodity prices, these sectors have been back on the track over the last couple of years.

For instance, Ponni Sugars, which traded at less than a rupee a couple of years ago, swept past Rs 100 recently. Renewed investor interest in these stocks, the emergence of new sectors and the re-rating of construction are critical in providing depth to the market.

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