Market Moves: It's time to exercise caution

It was around this time 2 years ago that our markets embarked upon the frenzied climb to Mount 21000 on the Sensex. And the end result was a steep fall to sub 8000 levels within 11 months from the highs created in January 2008. A majority of the analysts were talking of levels above 25000 at that time. Eversince the market touched 17000 on the Sensex (5000 on the Nifty) recently, these analysts are back to their old games. Investors are being advised to buy stocks at high prices, as if there is no tomorrow. Generally, the feeling of being 'Left out' lures retail investors to make the same mistakes repeatedly. Even Mutual Funds which were sitting on huge piles of cash when the markets were down in dumps, have invested heavily in the markets and their cash levels are down to between 5-10%. Agreed, that the economy is on a recovery path, but the process will be very slow and steady, and one should not expect the profits of the companies to rebound so soon to command such rich valuations. Foreign Institutional Investors have turned cautious at higher levels, and we may witness rounds of FII selling in the days to come. For retail investors, it is time to be patient. Generally, small investors who are worried about the safety of their principal investment should keep away from the markets at this juncture. Investment through SIP/STP may be continued, but do not get disturbed if the NAV of your fund temporarily dips below your average purchase price.

But this does not mean that there are no good opportunities to buy at this juncture. History tells us that every new bull run is made up of new market leaders, whereas the old winners fall by the wayside. At the current valuations most of the leaders of the last bull run like Reliance, L&T, BHEL, etc. look either fully priced or overpriced. On the other hand Auto and Realty sectors have had a fairly good run in the recent past, so they are also richly priced at current levels. If selective buying has to be considered, sectors like Retail (Pantaloon, Videocon, Geetanjali), Pharma & Healthcare (Ranbaxy, Fortis) etc. can be considered on dips.

But to reap  good returns from this market one must  have a minimum  investment horizon of 1-2 years, because that would be the time when corporate earnings catch up with the valuations. Yet, the market may surprise us on the upside because of the excess liquidity available in the system.

IPO Pricing & Listing Gains

Initial Public Offering (IPO) is as an exercise when an unlisted company makes either a fresh issue of securities or an offer for sale of its existing securities or both for the first time to the public. For example, the recent Oil India IPO had both the above components. Subsequent issue of securities by an already listed company is referred to as Follow-on Public Offering (FPO). The IPO can be in the form of a fixed price option or in the form of a book building method. In India, currently the 'Book Building' pricing method is in vogue. This method provides an opportunity to the investors to decide a fair valuation of the issue through the 'Price Discovery mechanism'. In a book built issue allocation to Retail Individual Investors (RIIs), Non Institutional Investors (NIIs) and Qualified Institutional Buyers (QIBs) is in the ratio of 35: 15: 50 respectively.

There was a time when investors made a beeline for new issues for the sake of reaping decent 'listing gains'. After a lull in the IPO market due to the crash in secondary markets, the primary market is again buzzing with activity, with a large number of companies getting ready to tap the primary market through IPO's. But the poor post listing performance of a few prized IPO's (Adani Power & NHPC) has made the retail investors lose interest in the primary market. A retail investor refers to an investor who applies or bids for securities for a value up to Rs.1,00,000. For this reason the Oil India IPO received a less enthusiastic response from retail investors. However, qualified institutional buyers (QIBs), who invest with a long term perspective are quite bullish about the new issues hitting the markets. It seems there is ample liquidity to take care of the future IPO's getting a decent response from QIBs.

Small retail investors will have to be careful in choosing an IPO for investment, and not be guided by vested interests promoting the issues through media. Since most of the new issues are being priced aggressively, including the new issues by Public Sector companies, the chances for making listing gains are few. If one has to invest in a good IPO one should invest with a long term perspective and not merely for listing gains. SEBI has made rating of new issues an optional exercise, but a majority of the companies get their IPO's rated by rating agencies (CRISIL, ICRA, FITCH etc.). The grades assigned to companies are avilable on NSE's website. The highest rating is a 5-star rating. Amongst the recent IPO's, the issues of OIL India Ltd. and Mahindra Holidays and Resorts Limited have been awarded a 4-star rating by CRISIL & FITCH respectively. Before investing in any IPO, retail investors are advised to go through the Red herring prospestus (RHP) carefully, or seek the opinion of their Financial Advisor.

Beware of Accounting Jugglery!

Better than expected first quarter results have brought cheer to the Indian stock markets. A prima facie analysis of the overall financial performance of India Inc. may have been enough to convince the bulls that the Indian economy is finally out of the 'Recession blues'. However, the quarterly results of a few companies are a result of some financial jugglery, and thus should be taken with a pinch of salt. As per the notification issued by Ministry of Corporate affairs (MCA) in April 2009, provisions of AS11 have been suspended for a period of 2 years effective March 2009. As per AS11 companies are required to mark to market (MTM) their Forex assets and book gains/ losses in their Profit & Loss account on QOQ basis.

Taking advantage of this notification, quite a few companies have changed their accounting policies w.e.f June'09 quarter thus increasing their profits. For example, Tata Motors reported a net profit of Rs.514 cr. for quarter June'09, which reflects an increase of 57% over corresponding quarter last year, despite a drop of 8% in its sales. A foot note to the results says that last year profit would have been Rs.502 cr. as per the amended AS11. Another company Moser Baer has reported a net profit of Rs.43 cr., which is higher by Rs.146 cr. due to the amendment in AS11. In real terms the company would have suffered a loss of Rs.103 cr.

These are just two examples of accounting jugglery. Many more companies would have resorted to such accounting practices to boost their bottom line. But this makes comparison of company results a much more complex affair. Investors must take cognizance of the foot notes in the company balance sheet before taking a decision to invest, rather than being taken for a ride!