India on the rocks

"Credit Default Swaps are instruments of destruction... ...It's like buying life insurance on someone else's life and owning a license to kill."

- George Soros

By Haresh Soneji, CNBC-TV18

If you want India on the rocks, you better take it bottoms' up. After all, India is being touted as one of the few economies which would continue to grow, when the world economy continues to contract. Correct, isn't it? Then why are fund managers not going full throttle on India. There exists a bit of anomaly, which seems to be confusing. India is being much hyped by foreign money managers, but they continue to remain underweight India. It's difficult to understand the rationale. Fund managers and economists seem to be contradicting themselves. For instance, Morgan Stanley's chairman Asia - Stephan Roach at a recent press conference in Mumbai gave a gloomy picture about the world economy - not expecting it to recover fast enough for anybody's comfort. He was pretty vocal about talks of green shoots sprouting and blamed CNBC's network in Europe and US of spinning data points. Of course, so furious was he with CNBC that he refused to look at me and answer my questions, preferring to look at the roof and elsewhere. He even went to the extent of telling me to be ashamed of working for the network, but realizing his comments quickly and added - just joking.

Ignoring his comments on us, he seemed to contradict himself when I asked him why TARP funds were being returned. His answer was banks no longer needed government intervention, hinting that the worst was over for the US economy. Now, wasn't the financial mess caused by banks which leveraged themselves big time? Morgan Stanley was one of the banks receiving $10bn in TARP funds. Is the worst over then you may ask? Yes and no according to veteran economist Stephen Roach.

It's not just one institution. Few other fund managers I met during the previous two weeks were similarly contradicting themselves. Though India was the place to stay invested, they were vary of investing funds at this point in time. In fact, from our discussions, booking profits was somewhat the bottom line. The market is already seeing profits being booked these days. Look at the small and the mid cap counters. While the benchmark indices seem to be in a trading range, the broader market is largely seeing a sell off. Stocks that have surged significantly are seeing profit booking. From circuit ups, to lower circuits now. Volumes on counters have diminished too.

India Inc. too seems to be coming out of the euphoric zone. From the enabling resolutions passed to raise money through QIPs, money is difficult to come by. For one, the promoter does not want to dilute much equity at such lower prices. Even though stock prices for most of these companies that have passed enabling resolutions to raise money, have doubled more or less, they are off their highs significantly. Real estate stocks, in which most of the enabling resolutions have been passed, had corrected 80% and more from their peaks. So, the promoters still do not want to dilute stake at such prices.

It's a Catch-22 for such promoters. They need funds to reduce leverage as financial institutions tighten the screws on their lending. Unsecured funds are available at frightening rates from non-institutional lenders to a few, for others even that is not available. Even the biggies are finding it tough to place their stock with domestic institutions. One of the big real estate player is running around the country's largest institution to place shares, but the deal seems to be stuck on margins. The same is true with many other players. The ground reality is not as good. The other instance is India's industrial output. While, India Inc. is confident and has risen output after several months of using inventory, the CNBC TV18 Boston Analytics Consumer Confidence Index continues to slip. The consumer is awry of the current situation and the future.

But, the market is ignoring all that for the moment. All eyes now seem to be on the Union Budget. Will it cheer the equity market? While the thinks so here is a counter argument. Historically, the first budgets are never populists. Second, things are tough this time. Fiscal deficit is high. Although that would mean divestment as one of the options, it would also mean a continued rate of taxes. More income at the hands of the consumer means inflation and its vicious circle. The government definitely doesn't want that at this point in time. A good budget will inch up the market that much more, but a mediocre one will see profit booking.

In conclusion, there is lot of money at stake. More money is waiting on the sideline to be pumped into India. This suggests premium valuations for India - a classic instance of too much money chasing too little stocks. But, the market is fully valued. Some sell side analysts are already trying to find value by raising guidance based on FY11 estimates. The problem however is the Rs 6,000 cr plus of MTM losses that has been capitalized this quarter. Numbers look good due to this factor only. But, once the IFRS becomes operational, the bleeding will be evident. The bottom line therefore is - it's a trading market. book profits, there is no much value across the table.

Disclosure: The author is not permitted to trade and/or invest into the equity market directly or indirectly, apart from investing (long only) in mutual fund products. His equity exposure is only to the extent of ESOPs granted by the employer.