AK NOMICS: Budget and the stock markets

Hindustan Times | ByAshok Kumar

Mar 21, 2008 11:53 PM IST

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For now, the stock is trading at a PE of less than 4 times its trailing earnings and the company is available at a market cap of less than 765 crore, writes Ashok Kumar.

Last weekend, I was a panelist at a post-Budget discussion at a Management Institute in Mumbai. My co-panelists included an economist from the Tata Group, an ex-Director of IDBI, an ex-Chairman of a bank and a prominent chartered accountant. The panelists raised some very interesting points and I recount a few of these below:

The annual Budget announcement is now more of a media event than anything else. Perhaps, that is why it remains an annual event.

Given the huge industrial write-offs of the 1980’s, is the hue and cry across Corporate India and financial fraternity over the farmer loan waivers justified?

Notably, the industrial loans were written off notwithstanding the ability of the industrial houses to repay, while most farmers simply have no wherewithal to do so.

Did the Budget have any impact at all on the equity markets, which now has its radar set on FOMC announcements more closely?

It’s a smart electoral Budget, with most voter segments being given a piece of the pie to ensure that they are not too dissatisfied.

Were the farmers better off last year? Did the income tax exemption limits merit lowering only this year?

That this was an election oriented Budget is clear from the fact that these announcements could have been made earlier too. And like me, most panelists recognised this as practical real-politik rather than mere populism.

Onto the markets. Enough has been said, written and read about the Bear Sterns’ of the world. Closer home, shareholders of Orchid Chemicals had a taste of what shareholders of Bear Sterns must have experienced, last week.

The stock went into a free fall during the week; down 44 per cent from its close of last Friday. The reason for such a sharp fall, while precipitated by the Bear Sterns crisis, can be attributed to the leverage position taken by the founder and MD of the company Kailasam Raghvendra Rao.

Reportedly, Rao had borrowed a sum of Rs 85 crore from Indiabulls and Religare Finvest to increase his stake in the company from 17 per cent to 24 per cent in April-2007. The recent plunge in the stock markets invoked margin calls from the lenders, which he was unable to meet, triggering the sale of the stock to meet margin requirements. Resultantly, his stake has dropped back to 17 per cent.

For now, the stock is trading at a PE of less than 4 times its trailing earnings and the company is available at a market cap of less than 765 crore, which is less than 0.70 times its market cap to sales. The stock thus seems cheap but is it really a value buy? Our research team’s opinion here is, while there could be some technical rebound at this counter, its near-term market prospects appear far too risky as it was not really the one-time sale by Bear Sterns but the company’s MD’s sale (forced or otherwise) of the stock that spooked the market.

More importantly, avoid getting distracted by looking at merely the relatively depressed price but evaluate it against companies available around the same price range with more robust business models. Chances are, you will find a better bet.

(The author heads Lotus Knowlwealth and blogs at www.theipoguru.blogspot.com)

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