me to question the very thesis of the bubble rally.

The funds who bought at the bottom of Sensex have now almost stopped
investing and sitting back watching the last idiot fund to buy at valuations which
can only be considered crazy if not unbelievable (PE funds begun and run by
Harvard MBA who probably have never gone to a single village in India).
But the funds who have 10 year view on this country, there are many
foundational thesis and drivers that are supporting the India growth story. I have
highlighted some of these below and should form a basis if you are ever looking
to invest into India. I personally believe after having invested in other parts of the
world (including US, China, Canada, Australia, London) that there is not a more
wonderful place to invest over a period of 10 years. That is probably testimony to
the premium that India enjoys and yet I believe, you have seen nothing. Wait for
5-7 year period for this country to truly blossom.
But nothing and absolutely nothing can absolve the nut fund managers who can
justify to buy suspect companies and business models at these valuations. Am
looking forward to see some of these funds to fold soon.
And yet there are exceptions to these: Funds like Chrys Capital, Warburg Pincus
(Ajay Relan specifically) and some more unheard of names who bucked the
trend and had the ability to look 12 months forward in April 2009, and invested at
the trough. Kudos to these funds!
Chronicalling

Indian

economy

super

charge

in

2009/10

It has been a stupendous performance as Indian economy grew at 7.5% against

a world growth of 2%, US growth of 1% Eurozone growth of 0% and Chinese

growth of 8.5% (suspect calculations?)
India has beaten every GDP estimate out there including IMF, HSBC, Barclays
and the likes. Infact it has even surprised me.
What is even more heartening is the GDP performance have come at subdued
inflation though over the last 2 months we have seen an uptick in WPI.
GDP performance
India GDP has grown to its pre crash levels and is very much set to cross into
double digit territory. Q4 reported GDP notched 8.4% on Year which has now set
the growth expectations for FY10 at 9%.

The higher GDP is reflective of the sheer ability of India to generate its own
demand and hence returns that independent of eternal capital. While the external
capital does help in sustaining the growth, it is not an absolute necessity as in the
case of China, Brazil and Russia.

The Growth has resulted in higher levels of Inflation but inflation has been
primarily found its way into food articles which have been a result of poor
monsoons and hence supply led. Food Inflation touched 16.8% YoY which is
threatening to trip the strong recovery.
RBI must be credited for leading a recovery with clinically low levels of heating in
the economy(Inflation ex Food has been well managed, that is till now) . WPI is
only now showing signs of getting into double digits. RBI responded by raising
rates unexpectedly on march 20,2010.

While stable Oil prices in the range of $60-$75 have helped, but it is the tight
lending regulation which has kept CPI and WPI at bay for much of the rally.

In response to Inflation rearing its head, bond yields have started to price in
further rate rises. Goldman Sachs expects 125 bps hike in RBI rates by end of
2010. We expect the 10 yields to stabilize closer to 8.5%.

Indian corporates have found it easier to manage its working capital compared to
global peers and hence allowed them to grow even through the powerful
recession under way in the US.
Credit Expansion
Bank Credit has come back to its previous levels and is growing at near 16.28%.
Small businesses and enterprises continue to lean on the bank generosity to
grow.

Rupee: Strength emerging against a super strong US dollar

Rupee strength in the wake of a super strong dollar (Dollar Index: 82) has kept
India Oil bills well under manageable limits while increasing India Forex reserves
to $280 bn as compared to $240 bn in April 2009. India has used the strong forex
kitty to buy 200 tonnes of Gold from IMF at $1045. Prices today fluctuate around
$1100/ounce.

Our view is that Rupee will take down 40 levels quite comfortably by 2010 end, if
not below that.
Exports: Back from the Grave
While much has been written about India domestic consumption as the heart of
the India Growth story, India has not disappointed on exports either. Exports
have notched 16.1% growth YoY which have led the logistics companies EPS
growth. While exports have been led by US and Europe recoveries and we
expect exports to moderate over the next 12 months partly due to slower growth
in developed economies post phase out of government fiscal measures.

Export form less than 20% of India GDP and hence lends a low degree of
dependence on Global recoveries. On a comparative scale, China has nearly
50% of 2.5 trillion GDP being formed out of exports to US and EU and hence at a
greater risk to global slowdown.
The bedrock of India export story is the Bellwether IT industry. Even if a
consumer led slowdown happens in the west, the IT industry may continue to
grow due to the importance of technology and cost reduction through
outsourcing, for US companies.
India: Optimistic Consumer
Indian consumer are among the happiest and optimistic set of folks around. Even
at the plymouth of the crash of 2009, Indian consumer had a strong sense of
optimism. We believe that this is very much reflective of the Indian style of life,
routed in family values and social in nature. The lack of leverage to family
finances helped the Indian Consumer to easily dodge the global slowdown which
had wiped off many families financial duress in the US.
7

India Politics
Last but not least, India has the best set of guys managing its 1.2 Trillion
Economy. In PM Manmohan Singh, India has found one the finest and erudite
PM of modern India. The FM, M, Pranab Mukherjee and the planning
commission chairman Mr. Ahluwalia have been credited in keeping the reforms of
this country under tremendous shape.
It will not be wrong to say that no Indian Political party has been able to reap the
windfalls of India growing economy, as much as the Indian Congress Party.

(Source: Shaily

(2010) India Economy and Stock Market Relentless Surge,

Economics / India Apr 01, 2010 http://www.marketoracle.co.uk/Article18346.html)

VOLATILITY IN INDIAN STOCK MARKET

Volatility is one of the best phenomenon without which stock markets will loose
its charm. It is the tendency of fluctuation of market indices over a period of time;
more is the fluctuation, higher is the volatility. The ups and downs of stock prices
is what that adds spice to the market behaviour. This see-sawing effect has its
own implications, both good and bad. Good, because prudent investors taking
advantage buy on dips and sell on highs for profit booking. On the flip side,
greater volatility lowers investors confidence in the market prompting them to
transfer their investment in less risky options due to unexpected market
behaviour.
Having observed the past major events of volatility, one can realise the root
cause as unanticipated information breaking out in the market. When this news
stabilises, volatility vanishes because the uncertainty related dies out.
Market returns seen muted in the current fiscal as India shifts into high growth,
high inflation mode
There's bad news in store for those looking at lip-smacking returns from equities
in the near tem. With inflation rate hovering over 10 per cent and the economy
set to clock over 8 per cent growth this fiscal, returns on the Street are likely to
be muted in the current fiscal. Don' get surprised, for a study by Execution Noble,
an Independent brokerage firm, shows that a cocktail of high inflation and high
gross domestic product (GDP) growth has historically been negative for the
markets.

High inflation is a greater drag on stock market returns than low GDP growth in
the economy, while a macro environment characterised by high GDP growth, low
inflation has historically delivered maximum returns on the BSE's market indices,
states the report. The study, which has covered 44 quarters over FY 00 to FY10,
has defined high GDP growth as above 7 per cent and high inflation as above 5
per cent. Similarly, it is the reverse in the case of low GDP growth and low
inflation. Realty and power sector indices have been excluded from the study due
to inadequate number of observations.
Says analyst Ritika Mankar, who has authored the study, "While high growth
translates into improved earrings for corporate sector, higher inflation in pacts
commodity-intensive companies and also those which have a huge employee
base owing to higher wage bills."
With respect to inflation, the market and also all sectoral indices perform
systematically better in a low inflation environment as opposed to one
characterised by high inflation. At the sectoral level, a high growth, low inflation
setting spells bliss for all sectors, barring banks and technology, states the report.
According to Mankar, given that the country is currently in a "high growth, high
inflation" environment and which is expected to persist over the next three
quarters, investors should look forward to incremental rather than exponential
stock market returns. The only saving grace in such a scenario is that capital
goods, consumer durables and banks will outperform other indices.

10

But more importantly, says Mankar, the study has been done to show that
inflation is a much more powerful explanatory variable of stock market returns
compared with growth. "AH sectors are worse off in high inflation, whereas even
in a low GDP scenario some sectors fare better," opines Mankar. In other words,
the current economic recovery is not going to translate into immediate returns for
investors.
Stocks to watch
Company name

Closing

Fortnight change

price* (Rs)

Market
cap* (Rs
cr)

Price (%)

Average
delivery volume

Wyeth
BOC India
CMC
MMTC
Alfa Laval (India)
Ashapura Minechem
KPlT
Cummins

815.15
294.5
1431.6
32813.8
1420.3
57.6
135.25

1.86
41.45
3.38
10.33
11.47
8.17
22.34

(%)
4095.81
1470.66
814.50
810.94
716.54
480.36
473.32

1852.0
2511.6
2168.9
164069.0
2579.3
455.0
1063.8

Infosystems
Phoenix Mills
Binanic Cement
3M India
Ipca Laboratories
Aventis Pharma
Akzo Nobel India
Marico
Ruchi Infrastructure
Sanghvi Movers
Radico Khaitan
Pfizer
Balmer Lawrie & Co.

220.25
82.2
2637.75
287
1822
721.7
115.95
45.3
185.55
119.75
1101.05
603.35

9.66
2.49
6.88
4.44
-0.82
18.02
8.31
1.00
2.88
-0.70
4.50
0.02

419.52
352.78
349.64
345.67
328.24
320.21
303.98
295.83
291.05
282.79
247.15
234.96

3190.2
1669.5
2971.4
3594.0
4196.2
2658.3
7065.3
929.7
803.2
1579.4
3285.7
982.6

11

BL Kashyap & Sons

345.8
Reliance
Industrial 1006.8

-0.52
31.53

228.43
224.44

710.4
1520.3

infra
Procter

8.07

220.87

6489.7

15.83
9.28
7.10

217.27
213.15
209.58

1007.1
4086.8
7574.6

&

Gamble 1999.25

Hygieni
Finolex Industries
81.2
GT L Infrastructure
42.4
Bajaj Holdings & 714.3
Invst.
* Data as on June 19, 2010
Source: CMIE

12

The right price

Appearances can be deceptive, especially in stock markets - it's the only place in
the world where there is higher demand at higher prices. If that was not confounding enough. also consider that stock prices fluctuate every trading minute.
Sure, prices tend to be fickle in local vegetable markets too as we haggle with
vendors, but the stakes are much higher in stock markets. Buying at the wrong
price leaves a very bitter aftertaste, so much so that one may vow never to enter
the stock market ever again. So what can make investing more profitable and not
a game of chance for lay investors? Think about it - what if stocks came with a
price tag that tells you how much it is worth. A tag of maximum retail price (MRP)
- pretty much like the stuff we are used to seeing at supermarkets and on most
product wrappers. This is precisely what the folks at MoneyWorks4me.com have
attempted - labelling not just every stock but also the benchmark Sensex with a
MRP tag. Sounds interesting surely, taut how can you go about putting price tags
on stocks? And even if you do, how reliable are these price tags and do they help
you get a first-rate bargain across good and bad markets? The Pune-based
Investment portal has devised a method to arrive at a price tag for stocks based
on the earnings power of a company are the likely multiple the stock will
command in future. To check its reliability, the firm has back-tested the model for
1999-2010.
But before we get to the findings, here is a pre-view into what triggered the
concept of MRP and how investing based on MRP can help. Quite of-ten, market;
tend to overreact. knowing when they are doing so can help you make wiser
13

Investment calls. In recent times, the overreaction was clearly visible after the
Sensex reached its all-time high of 21,206 in January 2008. Sheer mayhem
followed in the later months with the index hitting 8,500 in November 2008. The
market then rose only to double-dip in March 2009 before it regined composure.
Was such a decline warranted a; corporate earnings had not suffered drastically?
If you follow the value school of investing, you must be familiar with Benjamin
Graham's saying that "in the short run, the market is a voting machine, but in the
long run it is a weighing in chine." Raymond Moses, co-founder of Money
WDrks4me.com says over a longer period. their market will invariably reflect its
intrinsic value based on its earnings. "But during Voting machine moments if
there is a tool guiding you to gauge the extent of the under or overreaction you
lave a clear head-start. This is what triggered the conception of ME P for the
Sensex and stocks," adds Raymond.
MRP for stocks is fine but ho v does it help to have a price tag for the Sensex?
After all, as a long-term investor you can't be buying and selling the Sensex. The
logic is simple here The index is the "bellwether" for anyone tracking the stock
markets. New, what is a bellwether? The term has its origin in the bell placed
around the neck of the sheep that leads the flock. Hearing the ring, the shepherd
can locate the flock 'his description of bellwether could not be more apt for the
index because markets witness herding too. But unlike the flock of sheep which
gravitate only towards greener pastures, stock market; are hostage to both
positive and negative triggers. This could either be local politics, geopolitics,
capital flows or changing fancies of heavy weight institutional investors.

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15