The BSE Sensex is making valiant attempts to decisively cross the 14,697 peak it reached on February 8 but has not been able to ever since.
The NSE Nifty, which is not a free-float index like the Sensex, has managed to cross its previous peak. Two large IPOs, DLF and ICICI Bank, will divert part of the funds that could otherwise have gone into the secondary market.
Last week, the Sensex failed to get its chin above the 14,697 bar and dropped back to end the week at 14,003, down 506 points.
The biggest contributors were Reliance Industries (with 98 of those 506 points), Larsen & Toubro (47) and ITC (44). Investors are wondering which way the breakout will happen.
As far as money flow into the stock market is concerned, Life Insurance Corporation of India is planning to invest Rs 115,000 crore in equity and corporate debt.
Pension funds will be allowed to invest partly in equity. Private sector mutual funds will get access to surplus PSU funds. The Reserve Bank of India is releasing $5 billion of its over $200 billion forex kitty for investment in infrastructure. As India’s economy grows and the equity cult spreads, more money will keep pouring into the stock market.
But there are reasons to being cautious in the short term. Public governance is abysmal, and getting worse as elections approach. Often it is downright foolish as in the quest to squeeze tax resources with not a thought on how poorly those already raised are being utilised.
The fringe benefit tax on sweat equity is one example. Another is the levy of a 12.3 per cent service tax on sale of tickets for international flights out of India. The result: ticketing business has gone to other countries.
The most valuable state-owned company is ONGC, which has been headless ever since the Government refused an extension to its former chairman who made the firm hugely profitable.
The man nominated by an internal committee, RS Sharma, was refused the post by the Prime Minister’s Office and now, funnily, has been re-nominated! Similarly, State Bank of India, which has an unbelievable uninterrupted dividend history of over 150 years, is valued at $17 billion, less than private sector ICICI Bank and far lower than ICBC of China, which is valued at over $230 billion.
To see how the private sector extracts value, observe the $1 billion valuation sought to be extracted by Reliance Communication by hiving off its tower business into a separate entity.
The current stock of 110,000 towers is expected by the telecom regulator to grow to 350,000 by 2010. Reliance Communication’s valuation has shot up.
In sharp contrast, that of public sector Bharat Petroleum, Hindustan Petroleum and Indian Oil Corporation are languishing, because of the burden of subsidy forced upon them. Its not that these managements cannot extract value but, sadly, they are not allowed to.
Its better, therefore, to await a better opportunity to invest. The long-term story has not so far been vitiated by poor public governance. Pray that it will not be.