The FIIs, The Mutual Funds and The India Inc's growth story.


MP Guru
The chronicles of Sensex : The FIIs, The Mutual Funds and The India Inc's growth story.

In 10 months time Sensex moved from 7000 mark to 12,000 largely due to foreign institutional investor’s faith in Indian economy, better performance of corporates, resurgence of agriculture sector and liquidity in the market. Mutual Funds moped record level of money, over Rs.14,000 crore, a more than 30 fold increase from the last year and FII’s flushed nearly Rs.18,000 crore in the equity market.
Sensex is conquering new heights, that too in lesser number of trading days than taken to achieve the previous milestones. The sprint from 11,000 to 12,000 has taken 19 trading days, from first touching 11,000 on March 21 st to closing over 12,000 on April 20, 2006. So far it is the second fastest 1000 point run after the Harshad Mehta led bull-run, when Sensex touched 4,000 from the 3,000 mark in 19 trading sessions in 1992.

Sensex Milestones :
Sensex level Date Sensex Drivers
1000 July 25, 1990 Good monsoon and excellent corporate results.
2000 January 3, 1992 Liberal economic policy initiatives undertaken by the then finance Minister, Dr Manmohan Singh.
3000 February 29, 1992 Market-friendly Budget by the then Finance Minister, Dr Manmohan Singh.
4000 March 30, 1992 Liberal export-import policy.
5000 October 8, 1999 BJP-led coalition won the majority.
6000 February 11, 2000 Infotech boom
7000 June 20, 2005 News of the settlement between the Ambani brothers boosted investor sentiments
8000 September 8, 2005 Buying by foreign and domestic funds
9000 November 28, 2005 FIIs on buying Spree.
10000 February 6, 2006 Buying from FIIs, Local operators and retail investors
11000 March 21, 2006 Robust foreign fund inflows and a move by Government towards greater capital account convertibility.
12000 Apr 20, 2006 Massive buying from mutual funds around Rs.3400 crore in just 19 trading sessions, favorable credit policy. expectation of robust fourth quarter earnings by corporates and S&P upgrading India’s sovereign credit rating from stable to positive

Sensex sees second fastest 1000 point rally to 12000.
Market gives 74% return from 1st April 2005 to 31st March 2006
Liquidity in the market forces Sensex to new highs
FY07 budget signals low Government regulation.
Credit policy defers hiking of interest rates instead cautions key players on real estate and equity market boom.
Massive growth in inflows in equity market from Mutual Funds to Rs.14, 305crore from mere Rs.448crore in FY05.
Investors to exercise caution and keep long term horizon on their investments.

Source: Economic Survey Report 2005-06

Source: SEBI website

Source: SEBI website

The Boosters :

India Inc’s growth story
Indian growth story is being talked world over. Unlike China India’s growth is being backed by strong financial sector making it less risky investment heaven. With fiscal deficit of the country reduced to 4.1% of GDP and inflation as low as 4%-4.5%, forex reserves swelling to $154 billion, India has become an attractive destination for the foreign investors. India has witnessed three consecutive years of high growth. The government expects an overall GDP growth of 8.1% in 2005-06 up from 7.5% last year. Per capita income in 2005-06 is estimated at Rs.25,788 at current prices, up 11% from the estimated Rs.23,222 for 2004-05.
The global rating agency S&P has raised its outlook on India’s sovereign credit rating from stable to positive on grounds of strong growth outlook and improved prospects of a stabilizing public debt burden. This will also help in bringing down the cost of borrowing for Indian companies, particularly from the overseas market and increase foreign inflows in the domestic market.
According to some experts, the share of the US in world GDP is expected to fall (from 21% to 18%) and that of India to rise (from 6% to 11% in 2025), and hence the latter will emerge as the third pole in the global economy after the US and China.
On a micro view, the third quarter performance of the corporate sector has been satisfactory. The net profit of 517 companies for the December quarter has gone up by 32.40% on the back of a 17.52% growth in sales. Their operating profit rose 20.45%. The operating profit margins rose marginally by 60 basis points to 24.68% for the quarter ended December 2005 and the net profit margins rose by 139 basis points to 12.35%. The performance of India Inc, as highlighted by the early trend of robust financial results of FY06 is expected to be the further growth driver to scale Sensex to new highs.
The Mutual Funds :
The markets saw increased buying from the mutual funds because of huge money mobilized through launch of new equity schemes. FY06 witnessed massive growth in inflows in equity market from Mutual Funds to Rs.14, 305crore from mere Rs.448crore in FY05 (31 fold increase in the inflows). Mutual funds got flushed with funds from the hefty collection mopped up by new equity schemes in the past three months. Fund houses have managed to mobilize huge amounts of money through new fund offerings (NFOs). It is estimated that over Rs.12,000 crore have entered these schemes in 2006. On 16 March, Reliance Mutual Fund's new equity scheme 'Reliance Equity' had collected Rs 5800crore in the Scheme. This is the largest ever collection by a New Fund. SBI Mutual Fund, UTI Mutual Fund and HSBC AMC have together garnered over Rs.6,000 crore. These AMCs are now deploying funds in the market. From April 1 to April 21, 2006, net buying in equity market by mutual funds is around Rs. 1, 365 crore alone.
The FIIs :
The rise in market values of the Indian shares by more than double has been attributed to the persistent buying by foreign institutional investors. The surging index signals that the growth story of Asia's third largest economy is intact and liquidity flows into the bourses would continue to remain. FII net investment in the India equity market in the FY05 is around $4.02 billion (Rs.17,999.3 crore). Foreign portfolio investors have invested $1.52 billion in March alone. Money from Japan accounted for almost 40% of the net inflow from all foreign funds to Indian equities in 2005. Large portion of the FII inflows come in broadly through four to five categories. The first comes through India-dedicated funds. The second category of investments comes in as part of the allocation to India from emerging market funds. The third segment of inflow is through the hedge funds. And the fourth category includes long-term pension funds such as Fidelity.
Outlook :
The Sensex has given a return of almost 96% and the PE multiples have moved from 14.4 times in April last year to 21.82 times on 21 st April 2006, characterized by higher money flows from domestic and foreign investors which were waiting to be invested pushed the markets to new highs. The valuations seem stretched when compared to other emerging markets which are trading at a PE of around 12-13 times.
However, current 1,000 point run to 12,000 has been odd one out in terms it was mainly driven by the local mutual fund players. FIIs have witnessed buying of only $125.1million (around Rs.546crore) in contrast; mutual funds have pumped in around Rs 3466crore during the period. S & P has upgraded India’s sovereign credit rating to positive. With other positive developments like current budget & credit policy signaling low government regulations, Indo-US nuclear deal and recent move towards first roadmap to be announced by RBI on capital account convertibility soon is expected to attract more foreign funds and also allow local companies to tap foreign debt market more easily. Also, expectation of robust corporate results even on higher base is a confidence booster for the investors in the market. It seems there is lot of upside remaining for the Sensex going ahead.
Though in near term liquidity may drive the Sensex higher, but with interest rate heading north directions and oil prices crossing $70 per barrel might act as party spoiler of this bull-run.
As an investor one must get cautious of the market and avoid playing impatient short-term bets on market, instead a more patient and long term view is advisable. Since secular growth trend in the market is not sustainable, hence one must balance their fear and greed and adopt a bottom up approach for stocks.