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Indian stock markets: A bubble, or time to buy?


Mark Mahorney writes about the BSE bubble. His feeling is:
1. Nothing justifies a massive upmove in the Sensex (200% in three years).
2. American investors have caused the Sensex to move as much as it has.
3. These investors will get jittery and reduce allocation to India and boo hoo, our markets will cry and fall down.

I think Mr. Mahorney vastly overrates the “foreign hand” in the Indian Stock Markets. Today, the FIIs control little of the markets – most of the investing and trading comes from the retail investor.Yes, you heard that right – the retail investor, the guys like you and me hold the strings to the Indian Stock Markets.

What? You’re joking, right?

Er…no. If you take the bhavcopy (Trading statistics) of August 7, 2006 (NSE + BSE), it turns out that FII’s traded about Rs. 1,800 crores worth of shares. The total trading was over Rs. 7,000 crores. So, FIIs account for only 25% of our market trades. And this is consistent through the ups and downs of the last three years.

But, you think, this is significant, isn’t it? Well, look at it this way. Banks, Mutual Funds and DFIs (Domestic Financial Institutions) account for only Rs. 1,000 crores per day. Of the rest, nearly Rs. 1,000 crores a day comes through broker’s proprietary accounts. What’s remaining is the retail trades – Rs. 3,200 crores. Around 48% of our stock market is from retail trade.

Yeah, every once in a while the TV channels tout FII statistics and say that “foreign investors have exited” etc. But the vast majority of investors are Indian – Retail, Institutional and Corporate – so the FII exit only causes a short term panic blip on the markets. FIIs do affect sentiment, and any market with 48% retail participation will get swayed by sentiment. That would explain the 20% drop from the highs of April 2006. But people are still investing – simply because the corporate growth is still strong.

Markets are inching up when the smarter folks figured out, from our First Quarter results of 2006-07, that the corporate growth is still pretty darn good. BSE trades at a 15 PE on its primary index; and growth is at 28% y-o-y. Overpriced? Uhmm….no.

My prediction is that the markets will go up 10% in this calender year, and nearly 25% one year from now. The “bubble” is in individual stocks – real estate, cement etc. – which will crash (or have, like in steel). Across the board though, companies seem to be walking the talk.

I feel there’s upside – not on the whole Sensex or Nifty, but in selective stocks. For instance, Balaji Telefilms has done astoundingly well in the last quarter and has good visible revenue. It’s grown at around 30% and seems to have attracted more viewers for its tear jerker soaps and TV shows. Further, it holds a LOT of cash – nearly 185 crores, which is Rs. 28 per share. And it currently quotes at Rs. 118, a past P/E of 13 (at Earnings of Rs. 9 per share). For this kind of growth, at the same P/E, the share seems to have a good 20%-40% more in the next year. Note: I have held this stock for a while since the Rs. 83 levels.

So there’s value in individual stocks, but perhaps not so much in the market as a whole. Why? Some sectors are severely overvalued – like FMCG, Cement, real estate, infrastructure etc. Pick and choose among the rest. So buy, but buy selectively.


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