| Priyanka and her entrepreneur husband Kamish Makhija could well be the poster couple of India's emerging equity cult. With the handsome returns from their stockmarket investments, the couple have acquired a second home and a car. But for the past few weeks they are staying away from the markets because their astrologer and broker have advised them against investing in the current scenario.  | PENNY STOCKS
Penny Foolish, Pound Wise | | | | If unviable business models and stock prices delinked from profitability were the concerns about the tech boom and Ketan Parekh-led rally, the core concern of this bull run are penny stocks. Trading below their face value, several of these stocks have shot up because investors are not looking at the company's credentials and profitability (see table). For instance, few broking outfits would recommend stocks like Faze Three, Prajay Engineers, ORG Informatics or Rishi Packers but these stocks are buzzing in the market today. Faze Three saw a three-year profit growth of merely 2 per cent while Rishi Packers' profit growth is abysmal in absolute numbers but their trading volumes are at record levels.. Promoters of some of the companies often release false information about future plans which results in the stock price rallying so that they can exit, leaving the common investor with stocks which would crash if the market dipped. In July, a website reported that HFCL might reach a settlement with lenders to recast high-cost debts and that a private equity fund might take a stake in HFCL via preferential allotment at around Rs 30 a share. The stock price shot up by 8 per cent. When NSE wrote to HFCL to verify, the company clarified that no such development had taken place. Often investors buy penny stocks because they feel that even a slight increase would fetch them handsome returns. But experts say a cheap stock is not necessarily a good buy. Says Jigar Shah of Mumbai-based brokerage KR Choksey: "People are buying stocks on euphoria and tips." Penny stocks are not the only gainers. Even small cap stocks have run up to worrying levels. Nimesh Kampani, CMD of JM Morgan Stanley, says, "Invest in companies that are growth oriented and don't go by word of mouth." In the cacophony of the stockmarkets, advice often goes unheard. | | The Makhijas are not alone in their concern. India's growing breed of small investors are in a quandary. Is this bull run for real or will this be a repeat of the horrors of 1992 and 2001 scams? Should they stay invested or is it time to catch the flight? Punters, investors and fund managers on Dalal Street are all asking the same question-is the 134 point fall on August 23 merely a commercial break or is it the beginning of the end? On Dalal Street, the answer would depend on whether you are a bull or a bear. But the truth is, the answer would depend on what you believe fuelled the run. The bull run was predicted as early as in 2001 by stock guru Marc Faber but manifested only in 2003 as the India story unfolded. It was a story that had moolah, the mantra of competitiveness and the magic of the East. THE INDIA STORY
A combination of growth in tech and tech services incomes had already put Indian paper on global investors' order book. This was boosted by a spurt of pharma industry takeovers and by the end of 2003 as the export competitiveness story unfolded Indian companies were on the buy list of large funds. It also helped that compared with the low return environment in the US, India could have been El Dorado. Add the icing-the BRIC report which predicted that India would be one of the top three economies in the world. | | GUEST COLUMN: R. Ravimohan | | | Bulls Will Prevail Healthy corporate profits, rising demand and good liquidity mean that the stockmarkets will remain bullish  The stockmarkets have displayed a bullish trend in the past year. Increasingly questions about its sustainability are being raised. The two factors that underpin this bullishness are corporate performance and additional liquidity that are propping up the market with its buying deluge. The question of sustainability can, therefore, be answered by the outlook on corporate earnings and additional money coming into the system. Corporate earnings registered a healthy growth in 2004-5 and so far in the current financial year. Non-investment in capacity for nearly a decade and a steady increase in global demand for both manufactured goods and services is the reason for the demand-supply gap. This gap is being filled up gradually with some new capacity. However, given the heightened prices, there is a distinct preference to buy existing capacity rather than set up new capacity. Thus the demand-supply gap is likely to persist. Similarly, the demand for services is far outstripping the sector's ability to ramp up, leading to a growing unsatisfied demand. Rigidities in the system, inadequate infrastructure and undersupply of relevant skill sets are likely to keep the suppliers engaged in this upturn for some years. The cost of inputs is, however, a matter of concern. Input costs have risen, whether it is crude oil, coal, mineral ores, and other primary inputs. Productivity gains and margin squeeze have so far made sure that these primary costs are not being passed on to final consumers, and, therefore, inflation has been under control. This trend will yield a few more percentage point productivity gain. However, margins will be under pressure. The global liquidity position continues to be favourable. This is likely to subsist, given the expanded global economic activity and productivity gain, and the tentative nature of investment in capacity creation. India is now clearly one of the more favoured destinations for this liquidity, as evidenced by more than the lion's share of portfolio flows into India. Over $8 billion flowed in from FIIs after the Sensex crossed the 6000. The momentum remains strong and is spreading to new financial centres around the world. Given these trends, I expect the stockmarket to remain bullish. The possible risks that may halt this bull run are accidents like the East Asia crisis that compress demand, regulation that impedes inflow of investments, emergence of investment destinations more attractive than India, an unexpected squeeze in profit margins which shakes the market's confidence in future earnings growth and change in investment philosophy from growth orientation to bottom-line focus, which might contract valuation ranges. Lastly, I believe the stockmarkets present an aggregated view of individual businesses performance. So investment analysis must focus on specific stocks. While the above analysis sets the context, it is by no means an advice that implies that all stocks listed on the markets will do well. The author is CEO and managing director of CRISIL. | | As the greenbacks flowed in, India Inc recorded the highest every growth in profitability. On the back of three years of profitability, Indian companies have notched double-digit growth in both top and bottom-line growth. A sample of 1,765 companies shows that net profits for the first quarter of 2005-6 jumped up by 46 per cent while sales clocked a 15 per cent growth. | |  |  | | ROSHAN THAPA AND NIRANJAN SIRDESHPANDE (LEFT): Invested Rs 50,000 each The two friends started investing in 2004 after completing their MBA. Look for cheap stocks with low PEs. Don't go by tips. Favourites: Bell Ceramics, Binani Their portfolios are now worth Rs 4.5-5 lakh each. Plan to set up investment firm. d | | | ATUL AND SWATI REGE : Corpus Rs 10 lakh Having faced setbacks in the past, the Reges returned to the markets two years ago. Investment is a mix of long-term and short-term stocks. Favourites: Tata Tele, SAIL, NTPC Used the Rs 7 lakh earned to set up beauty parlour, renovate house. | | It isn't surprising that long after the US interest rate regime took a U-turn, investors kept coming in. This summer it was the Japanese who traditionally stalked only the Korean and Taiwanese markets. While investment consultants were bogged down with high-decibel debates on price, earnings and multiples, the Jap funds dug in. They simply wanted a piece of the action. Price anyway is a matter of relative comparison. To them Indian equity smelt good. In the past nine months, six funds have raised $4 billion (Rs 17,200 crore) from Japan. Index
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