It is back to Fundamentals

The Indian Stock market is now reacting to fundamentals, therefore, money making is going to be selective. The Year 2008 will see to it that money is not made on tips or hearsay. This is not the year of 'Momentum Stocks', so one should focus on 'Value stocks'. The current uptrend/relief rally or whatever you may like to call it, is based on the fundamentals of the companies on the basis of quarterly/ annual results for FY 07-08. The market will reward those who do their homework well. There are three levels of analysis to take stock of the market moves. It is known as EIC analysis (Economy, Industry and Company).

• Let us first analyse the Economic situation. The ngative factors are a high inflation rate and high commodity prices. Although, with the prospects of a good crop foodgrain prices are likely to cool off soon, but high crude prices are here to stay, and this may hurt the Indian economy very badly in the long run. But the positiove side is, that Indian economy is still growing, and even a slower growth rate of 7.5-8% will not hurt the sentiment badly. The CRR hike is already behind us. The credit policy on 29th may announce a Repo rate hike of 25 basis points, which has been factored by the markets. If the hike is higher it might effect the sentiment negatively. It is unlikely that the RBI Governor will resort to a steep hike, which might kill the India growth story. If no surprises are there in the credit policy the markets are likely to maintain their uptrend in the near future. Valuations of the overall markets at 17000 level BSE/ 5100 on Nifty are in line with the historical trends (PE of 20 trailing basis, and 17 for one year forward basis). The markets are not likely to move past the earlier tops in the next 6-9 months, because of the uncertain economic/ political environment. The range for the markets could be 15% on either side of the fair market value i.e. 14500-19500 for the sensex. Broadly this range may be utilised by long term investors: Buying at the levels of 14500-15500 and booking partial profits above 18500 levels.

• The next level of analysis is the Industry Analysis: Although the benchmark indeces give us a direction, all stocks within the index do not move in the same direction. The sunrise sectors of last year which have given super normal returns will no longer lead the uptrend. We need to divide sectors into three catagories: First the ones which have long term value at current levels and are less likely to be affected by an economic slowdown: Pharma & Healthcare, FMCG, Retail, Media & Entertainment. These sectors are more or less insulated from the economic slowdown. Selective purchases can be considered in stocks from these sectors. The next are the sectors that get negatively impacted by the slowdown: Capital goods, Auto, Banking & Finance, Realty & construction. Auto & Banking (especially PSU banks) are still quoting at reasonable PE multiples and can be bought on declines. But refrain from investments in Capital goods and Realty as most of the stocks from this sectors are quoting at ridiculously high PE's. Case in point are the stocks like ABB and Siemens. I would consider even L&T and BHEL expensive at current levels. The sectors falling in the third catagory are those which get affected by Govt. policies. These sectors are Oil & Gas, Telecom, Basic Metals. PSU Oil/Gas companies like ONGC, Gail, IGL, IOC, HPCL, BPCL are all quoting at reasonable PE multiples, but the Govt. policy is responsible for keeping them at subdued performance levels. Telecom sector is highly dependent on spectrum allocation. Diversified companies like Bharti still hold good value from this sector. Basic metals like Steel and Aluminium, and even commodities like Cement are currently under the scanner of the Govt. in its bid to control inflation. So, a prudent investor should stick to the first catagory of stocks for buying. Partial profit booking is advisable in the second catagory, whereas a wait and watch approach is advisable for third catagory of stocks.

• The last level of analysis is the Company Analysis: Generally the markets tends to give a thumbs down to certain sectors, and even individual 'Gems' from the sector get punished alongwith the market sentiment. Intelligent investors are those who are able to identify these gems from the beaten down sectors, these stocks ultimately turn out to be multi-baggers. One such beaten down sector in the current scenario is the IT sector, where lot of good growth stocks are languishing at ridiculuosly low valuations.

Year 2008 will prove that there are no short cuts to make money on the stock markets. Do your EIC analysis properly before taking an investment decision. Otherwise it will be better to park a large chunk of your money in fixed income instruments for atleast one year.