2005: A fruitful year, but...
Source: Equitymaster.com
Now that we have just begun 2006, let us look back into 2005 and read into some of the positives that impacted Indian markets and the challenges ahead. The year 2005 was a sort of a milestone as far as equity markets are concerned. The indices continued with their northward journey, which was started approximately 30 months back. FII inflows continued to be strong and the domestic institutional industry (mutual funds) also built up a considerable size, backed by increased retail participation.
A ready reckoner Going global: The year 2005 saw a large number of Indian companies gaining in confidence as was seen by their global forays (read overseas acquisitions). The size, number and the breadth of acquisitions were not earlier heard off. For instance, the Tata Group spent around US$ 1 bn in their quest of going global. If one looks back into the history, two years back, this was the ticket size of the entire Indian industry. Given the kind of activity witnessed in the last two years, there are expectations of more global acquisitions by Indian corporates as we move forward.
Easy access to capital: 2005 also witnessed the ease with which the corporates were able to access the capital markets, both domestic as well as international. While big Indian corporate houses went slow on global capital raising, there was a significant fund raising activity by the mid sized companies. The striking feature was the ability of smaller companies to access international capital markets at relatively cheaper interest rates. This kind of display of confidence from smaller companies would have been like a dream two years back. Similarly, there were a large number of private equity and venture capitalists making round of Indian companies, a scene witnessed after a considerable period of lull. Though not many of the private equity placements took place in 2005, it has definitely put the mid size Indian corporate on the global arena.
Foreign Inflow: While FII inflows continued to be strong for the third consecutive year, the striking feature was the diverse source of these funds. As compared to the US-centric money flowing in the Indian capital market two years back, 2005 witnessed funds flowing from all key regions of the world, the prominent being the EU, Japan and South East Asian regions. Apart from this, the FDI front also witnessed increased activities, with a blinking hope that the promises will materialise in 2006 and 2007. 2005 saw FDI announcements to the tune of around US$ 30 bn, led by the US$ 13 bn plans of the Korean steel-maker Posco. The actual FDI is expected to be around US$ 6.5 bn in 2005 as compared to US$ 5 bn in 2004 (representing a 30% YoY increase). Going forward, a large number of these announcements can materialise with more expected in the wings. However, in our opinion the biggest trigger for large scale FDI would be the opening up of the retail sector.
Proactive regulator: The Indian capital market regulator and other governing agencies displayed remarkable agility in decision making in 2005 as evident from the prompt handling of the 'penny stocks' situation. They made the right announcement at the right time. It seems that they have at last learnt from their past mistakes. While there is no guarantee that a proactive regulator can avert any major crisis, it can atleast reduce the impact of the same.
Despite all the positives as mentioned above, the scenario on the fiscal deficit front is not encouraging. The direct impact of this could be rise in inflation and hence the interest rate, one of the key drivers of the recent India growth story. Apart from this, a large number of Indian corporates have lined up huge capacity expansion plans. This could impact the earnings of the companies on account of higher depreciation and interest charge. Also, considering stretched valuations, investors need to tread with caution.
