By krsna Khandelwal – A veteran market analyst
Friends,
I gave an idea earlier as what the macro number convey to us. Since then there has been a further attempt to take the leading indices to higher levels. They (the unknown bull operator or let us say the unknown operator is preparing conditions to play the bear card with ferocious speed and for longer time) have been successful in making Nifty touch 6000 mark while Sensex kept company to scale 20000 mark yet again. While this was done on the strength of cap. goods/power/steel and the Reliance pack and the PSU giant ONGC, it was evident that the smart money was continuously moving out of the rest of sectors.
For the first time I listened on CNBC the results for the quarter (on aggregate basis) for some 1600 companies beside NBFCs and oil sector companies. What was given out has convinced me that we are on a downhill path, which extends far in to future unlike the impression so far that if the downhill journey commences it will be for a short distance and will end soon. The gross sales were up by around +14%, the other income was up by around +40%, the OPM was healthy at around +26%, and the PAT was up by around 24% and the interest outgoes were substantially up. This has clearly given the idea that the slow down is a sure thing. The high OPM level does not leave room for further improvement and the sales are not keeping pace, the interest burden has affected the profitability and is affecting the demand also. The bottom line is healthy due to the jump in other income, which comes out of the sales of some good investments or the surplus real estate of the companies.
The expanded capacities have yet to flood the goods in to market but such capacities are almost ready. The whole matter of concern is that capacities have been created as flow of money has been so generous in the hands of management and it came as a good percentage on capital employed. I have earlier also told that the Indian management is very much averse in distributing the windfall to shareholders and rather keeps it in company and uses for whatever it pleases for in India the mighty is the one who has the mullah. In a bid to save on taxes these managements (I am talking in general lest some in the other boat feel offended) have even gone ahead and loaded themselves with debt too, it has been just an effort to maintain debt equity ratio. This money pool gave them ability to expand capacities or even put up green field projects. Those who had still bigger flows have gone out of borders to expand empires like Tatas and AV Birla Group. The smaller ones have also done their bit in this area. Both the types have been imprudent and eventually will pay through their nose and of the shareholders who are attached by the umbilical cord and are fed as much as is deemed proper by the managements. The leftover remains more at risk than the money of the managements as they gift themselves with cheap equity and handsome remuneration. These very managements who one time reward themselves with cheap equity start selling their controlling stakes into market before the public has an inkling of the rough patch ahead. You, the reader, may check how much the promoter stake has come down for the last two quarters and how much more would be sold in the intervening period i.e. from now until Dec 07. You must do this homework.
The smaller fries, which got the ESOPs, have done the same thing. I even overheard the gossip that the top brass of L&T has become rich in their own right and may leave en block to set up a company like the one the one L&T from out of money got through sale of their ESOP stake. They are sure of wooing the right people out of L&T. Though it may just be a rumour but what the design shows has a streak of genius.
There is a danger lurking on the construction, infrastructure and cap. goods sectors. The Chinese are the giants in these fields and they are going to be shortly free from their Olympic related projects. They would come here to compete fiercely with Indian pygmies and the infrastructure space here is nowhere near the Chinese scale of activity in recent past. They have no dearth of capital and expect much lesser return on capital employed. So, who is making fool and who is being fooled can be clearly made out. The organised attempt of the predators has now the support of massive market convenience and the added F&O tool. The bait has been set; the prey will be the one who will fail to understand the design.
Please excuse me if any of you think otherwise. Just have patience to wait for some time and then pass your judgment; I would be more than willing to accept my analysis wrong. Once again, I remind you that logical progression in the business world happens albeit with some time leg so the prudence is only to be in safe waters before the deluge of any kind occurs.
Hari Om
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