KOLKATA - It is the single sector in India
where the country's economic success story is the
most apparent. Defying global factors like soaring
oil prices, natural calamities and terrorist
attacks, and local issues like a split in the
country's biggest business empire and the constant
tussle between leftist and rightist factions of
the present government, the country's stock market
has been scaling new heights almost every day for
the past two months, driven by foreign investors'
eagerness to cash in on the opportunities in one
of the world's fastest growing economies.
The Bombay Stock Exchange's Sensex, the
benchmark index, broke all records last week when
it reached the psychological magic mark of 8,000
points and continued its gravity-defying rise on
Monday to close at yet another all-time high of
8,138 points (up by 78 points over the previous
close). In the 60 days that the
Sensex took to race past the
8,000 points from the earlier psychological
barrier of 7,000, FIIs have pumped in over US$4.5
billion - more than half the $8 billion-plus the
FIIs have invested in Indian stocks this year to
date.
Following the extended bull run, the
Indian stock market is being re-rated by global
investors, said brokers. According to FIIs, the
sharp upturn in India's economic fundamentals has
forced foreign investors to finally wake up to the
Indian growth story, which has resulted in
improving the overall rating for Indian shares.
But though the renewed interest by FIIs was the
major driver for the current rally, the
corporatization of the Bombay Stock Exchange (BSE)
also acted as a catalyst in the bull run. The
symbol of capitalism in India, the BSE, turned a
new leaf in its 130-year history by turning into a
corporate entity from August 19. From that day,
the new BSE Ltd started functioning as a company,
where the management control of trading members or
member brokers stood reduced to only 25% of the
seats on the new company's board.
Set up
as "The Native Share and Stock Brokers
Association" in 1875, the initial trading of
India's first stock exchange, later rechristened
as the Bombay Stock Exchange, started with just
four member brokers under a banyan tree, very near
to where the present BSE building - Jeejeebhoy
Towers - stands. BSE now has over 700 brokers as
members.
Once known as a "closed club" of
brokers, the oldest stock exchange in Asia has
often been criticized for its nontransparent and
undemocratic practices, but it has stood the test
of time. The exchange has continued trading
through two World Wars and several aggressions
against the country. Over the last decade and a
half, it also withstood the serial Mumbai bomb
blasts of March 1993 - defiantly opening for
trading the following morning - and the two
biggest stock scams in the country's history: the
Harshad Mehta scam in 1992 and the Ketan Parekh
scam in 2000-2001. The BSE is also the exchange
that provided a launch pad to two of India's most
famous companies, Reliance Industries founded by
the Dhirubhai Ambani in mid-70s, and Infosys
Technologies founded by N R Narayanamurthy in the
early 90s.
The last seven years, though,
have brought the most momentous change for BSE. It
replaced its age-old outcry system of trading with
computers to become fully online, and removed the
unofficial lending and borrowing system called
badla, which had become a notorious and
illegal form of derivative trading. During these
years, it has also lost equity market share to the
decade-old "cutting-edge" electronic stock
exchange, the National Stock Exchange (NSE),
established to give India a counterpart to NASDAQ.
Currently the NSE commands more than a 70% share
of the country's daily capital market transaction
volumes, with the BSE less than 30% (other
regional stock exchanges share the balance). "But
now that it wears the tag of "Ltd" (the short form
of the word "Limited", representing a public
limited company), BSE is set to bring in a new
work culture as corporate entity and innovative
strategies," says its new CEO, Rajnikant Patel.
"Today we serve a host of foreign institutional
investors and operate in a more competitive
environment. The new corporate structure should
help the exchange regain its lost glory."
Nevertheless, even as India's stock prices
continue to break new records every day, the
question that looms large is what next? According
to P K Basu, managing director of Robust Economic
Analysis, Singapore, considering India's growth
rate, which is expected at around 7%, with core
inflation still under control (at less than 4%),
corporate earnings for the next two years could
grow at 12-15% a year. Based on such growth
estimates, the overall price-earnings ratio (the
ratio of the price of a share to earnings
potential, a parameter used widely by investors)
of the stock market is around 14-15.
For
more than a decade, the Indian markets have
hovered at an average P/E ratio of 17. "This means
that the Indian market is not overvalued just
yet," says Basu, but adds that the "the market is
not cheap either". Analysts like Basu feel that
from the viewpoint of foreign investors, who also
have a choice of other emerging markets, Indian
markets may be close to getting overvalued. For
instance, on the basis of projected year-end 2006
earnings, Asian peers like South Korea (P/E of 9),
Taiwan (P/E of 1) and Thailand (P/E of 10) are
cheaper, while Singapore and Hong Kong are on a
par. "There's a case for caution because the
market has moved up too far too fast," says Basu.
But optimism overwhelms caution with many
others. "The 8,000-point mark is just a
psychological barrier," says Mihir Vora, head of
equities at ABN Amro Asset Management Company.
Vohra and his ilk like Andrew Holland, executive
vice president, DSP Merrill Lynch, feel that fund
flows are the key to Indian equity markets and "as
long as India's GDP growth continues as per
expectations, funds will keep flowing in". Experts
say foreign institutional investor (FII) flow will
exceed $10 billion in 2005. Indian mutual funds
are also collecting good money, which will pump up
the stock markets even higher. "We are still
bullish on the market," says Vora. Adds Holland:
"Lots of liquidity is sloshing around, especially
in the Asian markets, and the general belief is
that overall risks are lower than the returns."
Indrajit Basu is a Kolkata-based
equity-analyst-turned-journalist with more than 12
years of experience in business/finance and
technology journalism. Besides writing for Asia
Times Online, he writes for US-based publications,
as well as IT companies.
(Copyright
2005 Asia Times Online Ltd. All rights reserved.
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