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          THE UNION BUDGET 1992-93
                    AND THE
                CAPITAL MARKETS
         Professor Russi Jal Taraporevala

On 9th March, 1992, Professor Russi Jal Taraporevala presented
his Budget Analysis, followed by the Sectoral Analysis, as also
his view of the Budget's implications on the capital market, and
what an investor should do under the circumstances. Professor
Taraporevala said that Dr. Manmohan Singh needs to be
complimented for presenting the best of the Budgets India has
seen since independence and that the stock market has
justifiably applauded the same. But he wondered as to whether
the applause the same. but he wondered as to whether the
applause was a bit too loud. On 10th March, the BSE Index slid
by 231 points, and on 11th March it slumped by 152 points. In
the past, on twenty-seven occasions, Professor Taraporevala
has succeeded in predicting market behaviour correctly Capital
Market is happy to present here the exclusive coverage of his
views, as contained in his lecture to the Bombay Stock

The Economic Survey of the Government of India highlights a weaker, compared to
the previous year. it admits that the monsoon plays a crucial role in agricultural
production. The budget must, therefore, be analysed in the context of the
extraordinary run of four good monsoons, of which the last one was the weakest.
Gross National Product (GNP) at 1990-91 prices, according to the new series,
showed a 10% growth in 1988-89, 5% in 1989-90,5.8% growth of the Indian
economy has slowed down. The GNP during the Seventh Plan rose by 5.5% per
annum. But net per capita product rose only at the rate of 3.4%, because the
population continues to grow unabated at around 2% per annum. The Finance
Minister, in his budget speech, said, "The overall I expect GDP growth in 1991-92 to
be arounf2.5% I expect a distinct improvement in 1992-93 and a return to high
growth in 1993-94.'Further he said, "It will take sustained effort over atleast three
years to bring the economy back to the path of rapid and sustainable growth.
"However, three years is a long time and the Finance Minister should make every
effort to compress period. Officials of the finance ministry said after the budget, that
GDP was expected to rise by 3.5-4% in 1992-93. This is a much slower rate of
growth than achieved in the past years. The Eight Plan will commence on 1 st April
1992 and aims at an average growth of 5.6%.


The index of agriculture production, which had fallen by 0.8% in 1988 because of a
bad monsoon dramatically by 21% in 1988-89, 2.6% after rising by 2.1% in 1989-
90, 2.6% in 1990-91 but is estimated to show growth in 1991-92. Similarly, food
production d ruing these years rose from 140 million tons in 1987-88 to 169 tons in
1988-89, 171 million tons in 1989-90 and 176 million tons in 1990-91. It is
estimated that, at best it may be million tons, in this current year, provided that the
rabi crops is very good.

Thus the overall food grain production during 1991-92 may be lower than the target
of 182.0 million tons as the last year's level of production.

Industrial production

The index of industrial production increased by 7.3% in 1987-88, 8.7% in 1988-89
8.6% in 1989-90, and 8.5% in 1990-91. But is estimated to have fallen by 0.9%
during the April- Nov'91 period. This recessionary trend is more announced in the
manufacturing sector. The Economic Survey points out that the trend in the
production in the manufacturing sector was much steeper at 2.3%. a growth of
11.5% during the Apr-Nov period of the past year.

The Survey mentions that if every thing goes well next year, the rate of industrial
production is expected to grow by 3-4% against the past growth rates of 8%.


The Economic Survey mentions that the performance of the infrastructure shows
mixed trends. Energy, railways and shipping have exceeded their tariffs. But the
petroleum sector performed poorly as the production was lower than the level
achieved last year. the production of crude oil, which was 32 million tonnes in 1988-
89 and 34 million tonnes in 1989-90, is estimated in 1990-91 to be 33 million
tonnes. In the Apr-Dec'91 period the crude oil production jumped to 22.97 million
tonnes from 24.7 million tonnes in the corresponding period of the previous year.

Imports of crude oil and petroleum products had, therefore, to be dramatically
raised causing foreign exchange drain. The country has spent Rs.6344crores to
import 26.36 million tons in 1989-90. In 1990-91 the import were 29.36 million tons,
amounting to Rs.10717, crores. In 1991-92, the imports are estimated to jump to
32.8 million tons. Therefore in the last three years our imports or petroleum
products have risen from 26 million tons to 32 million tons, which caused a sizeable
foreign exchange drain on our Exchequer. The sudden decline in petroleum
production which is causing substantial pressure on imports is due to the inefficient
working of the Public Sector, disturbances in Assam, and wasteful flaring of gas.
Under these circumstances, the government has at last realised that it cannot allow
the public sector to monopolise the oil industry. The Finance Minister said the
government would welcome proposals for private investment including foreign
investment in production, refining and marketing of oil and gas, with a view to
maximising the growth potential in this crucial area.

The Economic Survey correctly points out that the potential for overall growth in the
industrial sector is crucially dependent on continuing adequacy of investment and
performance in the infrastructure industries. Therefore, the government decided to
allow the private sector to play a role in the infrastructure industries like electricity
generation, road building etc. what is interesting in the Eight Plan document is that
there is a shift in emphasis in the structure of the investment plan. The total
investment is to be of Rs.792000 crores at 1991-92 prices. The public sector is to
invest Rs.342000 crores, foreign savings are estimated to contribute Rs.49000
crores and the balance is expected to be contributed by the private sector. Thus, the
Economic Survey points out that the balance has shifted in favour of the private
sector, allowing a large scope for this sector than was given to it before.

Industrial Investment

Since the licencing system is dismantled , the tempo of industrial investment should
be compared for Apr-Dec'91 with that of previous year. The first indication is the
industrial enterprenueral memoranda filed of investment intentions. These rose from
2763 to 4699. Second, foreign investment rose from only Rs.87 crores to Rs.474
crores, and recently the same has been estimated for the currently year to rise to
almost Rs.900 crores. Foreign technology agreements signed rose from Rs.345
crores to Rs. 541 crores. Assistance by the financial institutions during the same
period rose as follows: sanctions rose from Rs.7118 crores to Rs.7805 crores,
disturbances from Rs.4311 crores to Rs.6030 crores and the CCI approvals of new
issues from Rs.9502 crores to Rs.12576 crores. There is a clear increase in
investment momentum.

Fiscal and Monetary Policies:

The Economic Survey on fiscal and monetary policies points out that money supply
flows during the current financial year have been faster than the previous year, even
though the RBI credit to the central government and bank credit to the commercial
sector have expanded at a lower rate. This is primarily because of the substantial
build up in the foreign exchange reserves. Here again, despite the tight credit
policies, there has been a growth in money supply. Interest rates were repeatedly
raised till the minimum lending rate soared to 20% in Oct-91. The Finance Minister
realised that such a savage credit squeeze and high interest rates were hurting the
economy. He, therefore, announced a slight easing of the credit squeeze in his
budget speech and reduced the statutory liquidity ratio on incremental domestic
liabilities of the commercial banks from 38.5% to 30%. This will release funds for the
banks to expand credit to agriculture and industry. Though it is difficult to assess the
impact of these measures, it is estimated that the funds released would be about
Rs.2600 crores. The RBI also cut the floor levels of interest rates by 1%. Both these
developments are most welcome and are bullish for the market.

Balance of Payments
Our foreign exchange reserves which in 1987-88 amounted to Rs.7687 crores,
Rs.7040 crores in 1988-89 and Rs.6251 crores in 1989-90 had fallen to Rs.1666
crores by 16 Jan-92. In Jun-91, when the new government look over, there was a
serious crisis, and even the risk of default in repaying foreign obligations which could
have led to dire consequences for the country despite the former government
borrowings heavily from the IMF. The new government took a number of bold policy
measures to tackle the crisis. As a result of which our foreign exchange reserves rose
to and appreciable level Rs.11000 crores restoring international confidence in the
Indian economy. Some of these reserves were built by our borrowing further from
the IMF. Despite devaluation of the rupee in Jul-91 by 23%, unfortunately our
exports have not picked up. The Finance Minister said in his speech that export
earnings have suffered badly this year, mainly because of disruption of trade with
the former Soviet Union and also because of the recessionary conditions in the world
market. As a result, we have not been able to finance our normal import
requirement. He pointed out later that the only lasting solution to our balance of
payments position lies not in compressing imports but through a rapid expansion of
our exports.

The external situation today, therefore is, perhaps the most important and sensitive
factor in India's development. Bulk imports of petroleum products, fertilizers, edible
oils, iron and steel products and capital goods dominate our import picture.
Fluctuations in their prices can throw our balance of trade picture into chaos. The
country has become sensitive to fluctuations of prices of these imports because of
our difficult foreign exchange situation.

The Finance Minister has taken a very bold step in introducing partial convertibility of
the rupee with effect from 1 March'92 in respect of current account transactions.
Effective from that date 40% of the foreign exchange inflow would go to government
at a fixed rate to finance essential inflow of canalised items and medical supplies,
and 60% inflows would be available for import dividends, royalties etc a floating
rate. Earlier they were getting 30%. Extra scrips against exports. After this was
introduced, the rate for the U.S. dollar stood at Rs.25.96, while for the 60% free
float, it stood at Rs.29.

The Rupee has thus been devaluated for private industry in relation to current
account and for all non-government transactions by 10%-15%. The devaluation of
the Indian Rupee is always bullish for the stock market. It increased the value of the
existing plants within the country because the imported components in them become
all the more valuable. Devaluation also protects the domestic industry like a tariff
barrier and makes exports competitive. So stock markets round the world have
considered devaluation of currency as a bullish factor for the market. The
government should aim at speedily implementing total convertibility of the rupee.


The FERA Act is to be amended to remove many of its restrictions and speed up the
progress towards total convertibility of the rupee. What would be extraordinary
bullish would be total convertibility which would include convertibility on capital
account. The SEBI Chairman has estimated that if capital transactions are made
freely convertible the capital inflows would occur between two or four billion U.S.
dollars annually. The Finance Minister hopes to get U.S.$ 3 billion to finance the
trade gap. He wants to take a couple of years before introducing convertibility on
capital account. Total convertibility will also encourage greater inflow of NRI funds.

Budgetary Balance

The budgetary position of the government shows that the revenue deficit suggested
for 1991-92 of 13854, crores rose to 17081 crores and for the next year is estimated
at Rs.13882 crores. The budgetary deficit shows that the estimated deficit of
Rs.7719 crores became Rs.7032 crores for 1990-91 and the next year, it is
estimated at 14872 crores at current levels of taxation.

For the first time in Indian fiscal history, the estimated deficit has not been
exceeded, as has been happening during the past budgets. The public finances of the
of the country have been kept well within the budget, which is an excellent
development in terms of fiscal discipline----which was not in existence for the past
15-20 years.

Direct taxes

In the filed of personal taxation, the exemption limit has been raised from Rs.22000
to Rs.28000 /-. The slabs of income tax have been rationalised so that there are only
three slabs of 20%, 30% and 40%. The surcharge is to continue the maximum rate
of income tax for individuals has been reduced from 56% to 44.8%. The Finance
Minister clearly said that there will be a cut in the rates he has reviewed certain,
concessions. The main concession under Sec 80L, which allowed a deduction of
Rs.13000/- in respect of dividend and interest payment etc, has been removed. He
has balanced this concessions by a cut in the tax rates besides raising the exemption
limit. The concession under Sec.80 CCA which allowed deduction of Rs.40000/- from
the income in respect of NSS have been shifted to Sec 88. He also revised Sec 80
CCB, under which a deduction of Rs.10000/- was available if investment in equity
linked schemes.

The next change is in the taxation of long-term capital gains. This is simplified and
the rates have been lowered slightly. Individuals will be taxed at 20%, companies at
40% and other at 30% of long -term capital gains. Substantial concessions have
been given in respect of calculating the cost of the asset. Firstly, the cur off valuation
dates have been shifted from 1974 to Apr-1,'81. The system of indexation of cost of
is to be introduced and linked to 75% of the consumer price index. This means that
rates will be published by which the cost will be adjusted notionaly in various years,
depending on inflation. This is a very substantial concession. This type of taxation
and indexation exists abroad and it attempts to tax, not monetary gains, but capital
gains in real terms.

Dramatic changes in Wealth Tax are introduced where by productive assets like
shares, securities, bonds, bank deposits, units of mutual fund etc will be totally
exempted from Wealth Tax Only non-productive assets like guest houses, yatchs,
planes, bullion etc would be subject to Wealth Tax.

Corporate taxation has bee left untouched, as the Finance Minister is awaiting the
recommendation of the Chelliah Committee. Certain changes made for revenue
purposes like providing past depreciation and investment allowances in excess of Rs.
1 lac can be set off by only 2/3rd in the assessment year'92-93 and the balance
would be allowed in the assessment year'93-94 the effect of this is small--about
Rs.1500crores. Mutual funds are now to be totally exempt from Income Tax.
Therefore, he has created a level playing field for the public sector joint sector and
private sector mutual funds.
Indirect Taxes

Custom duties have been raised to yield Rs.776 crores. Some duties have been
reduced by Rs.2799 crores. Thus the net decrease in revenue on account of custom
duties is Rs.2023 crores. The main changes are that the peak rates have been
reduced to a maximum of 110% incurring a loss in revenue of Rs.1700 crores. The
capital goods duties have been reduced, involving a loss of Rs.840 crores. There are
changes in excise duties which raise the burden by Rs.2516 crores, but there are
decreased in excise duties involving a loss in revenue of Rs.305 crores, giving a total
net increase of Rs.2211 crores. The special excise duty rate has been raised from
10% levying a thin layer of indirect taxation on almost all items.

The Finance Minister has said that he awaits the recommendations of the Chelliah
Committee but he would like to reduce corporation tax to 30-35%. This is a very
heartening and bullish prospect. If next year, he can cut the corporation tax from its
present high levels around 30 to 35%, he would make it comparable with what exists
in many other countries, and make other countries and help to attract foreign capital
into India.

The budget, therefore, represents a transition from the insulated socialistic policy to
an open market policy regime. The Finance Minister has also warned Indian
industries that it is his goal to reduce the custom duties to 25%. Industry has been
given time to modernise, to grow to a minimum economic size and to be ready to
compete in the world markets. These developments should be welcomed by all.
Unfortunately, although this development in enormously bullish for the tock markets
and for the growth of the economy, it is sad to find that some of the older industrial
groups and some of the old----fashioned economist, professionals and socialist
politicians are afraid of these developments. They have to adjust to these
developments if they wish to survive.
Part 2: SECTORAL ANALYSIS………………………

The Sectoral analysis assumes that the next monsoon will be
moderate: it may be slightly lighter then the last one and that there
will be no political upheavals. The foreign exchange situation will
continue to be under control and inflation will remain around10% and
that the new economic policies will be vigorously implemented and
GNP will grow atleast 3.5%.

                                     Additional excise could be absorbed
The industry has had a bumper first half year. The demand softened in second half of
the fiscal year and prices of cement dipped. Overall, the industry has had a very
good year. The budget has levied a excise duty to yield Rs 376 crores. Because
theindustry was earning bumper profits. The burden of excise duty plus freight can
be evaluated roughly at Rs.6 per bag, although the industry claims a burden of Rs.10
per bag incase of increased costs. Considering the prices of cement which have rated
between Rs.85 and Rs.115. the burden could be absorbed, if the demand is buoyant.
It can be passed on to the consumers in the short run, softening of demand may cut
into profits. But the industry can now export.

Today, the profits from cement companies are largely flowing from capital intensive
plants built years ago. Therefore, corporate tax has started bitting into the gross
profits, and reducing the net profits of some of the older companies. For the long
term, a bright future awaits the industry, because demand growth is unlikely to be
matched by new capacity. For example, a million tonne plant of cement, five to
seven years ago would have cost of Rs.100 crores. Today it is estimated to cost
anywhere between Rs.300 to 350 crores. Thus cement prices would have to rise
substantially to make new plants viable and the industry does not foresee a huge
flood of entrants.

Nevertheless, some cement shares in the market are trading even above the
replacement cost of the new plants, which is ridiculous. For instance a one million
tonne plant is traded at a market capitalisation of Rs.600 crores. This is unrealistic
because there is no value in this. Investors may take replacement cost in relation to
capitalisation of companies before buying shares. They should not pay fancy share
prices which may be double the replacement cost of the company.

                                                                  A bright future

It has at last been decontrolled. The main private sector integrated plant will show
excellent results and plans a gigantic expansion of one million tonnes. Profits should
be higher by Rs.60-100 crores in the next year. some of the public sector steel
shares may present good opportunities to investors when they start trading on the
share markets, for all the sector of the industry. The budget, under the guise of
rationlisation increased the excise duty on cotton yarn to yield Rs.80 crores and on
fabrics 20 crores, imposing a total burden of Rs 100 crores. While the yarn
producers may be able to pass on the duty, the fabric sector remains doubtful.
There are only a few modernised mills making money today in the export market.
Domestic demand is met increasingly by the powerloom and handloom sectors.
Therefore. Investors should avoid this industry for fresh investments, except those
mills that are totally modernised and have export performance.

                                                               No strong growth
The budget has made changes in the excise duty, to simplify and personalise the
tariff structure and reduce the excise duty difference between various textile fibres
and yarns. Nylon producers has had a very poor year. several units in the nylon an
polyester filament yarn industry are passing through difficult times. The Finance
Minister has taken notice of this. The excise duty on NFY has been reduced by Rs.8
per kg. The import duty on caprolactam has been reduced from 80% to 50% but of
course, the devaluation has pushed up the cost of the imported inputs. The industry
made either low profits or reported losses in the past year. even nylon tyrecord is
glut and the industry is not showing any strong growth.

Polyester Filament Yarn & Polyester Staple Fibre
                           Intermediate manufacturers benefit

PFY and PSF had a bad year. Demand has been much less than installed capacity.
The excise duty on industrial PFY has been reduced by the Finance Minister to the
extent of Rs.255 crores. This should help the industry, though it may not be able to
retain these concessions. New producers in the industry are increasing. The PSF
producers are trying hard to raise exports in order to improve capacity utilisation and
there are some signs that the exports are picking up. These industries are not
glamorous any more. But the industries which have made a very high profits, are the
producers of intermediate products like PTA,DMT and MEG. They will continue to
make reasonable profits.

                          Oligopoly to help pass on duties

These are cheap fibres which compete with cotton. The flare up in cotton prices has
resulted in the increase in the prices of these fibres over the last year. the industry
has had an excellent year. the Finance Minister has tried to tap its profits by raising
the excise duty. The excise duty on VFY is raised from Rs.12 to Rs.15 per kg to yield
a revenue of Rs.15 crores. The excise duty on VSF has been raised from Rs.10.50 to
Rs.12 per kg to yield Rs.57 crores. The producers will make a strong effort to pass
on the duty but they may have to bear some part of them. The duties can easily be
borne by the producers as they are in an oligopolistic situation and they can do price
fixing in relation to imported cost of these yarn and also domestic prices of cotton.

                                             Stand- alones will be hard-hit.
Demand today exceeds supply and there are substantial imports. Prices were raised
by 30% last year. however, the budget continues the provision of fertilizer subsidy.
The domestic subsidy is estimated to cost Rs.3.500 crores for it is also a provision of
Rs.1500 crores for subsidising imported fertilizers. The industry is extremely worried
about changes in pricing and subsidy norms. In the past year, there were substantial
delays in the payment of subsidy by the government to the producers, which caused
a number of units, especially SSP units to close down. The government should pay
the subsidy promptly in the years to come. The stand alone new fertilizer plants will
not be visible and may not show profits for many years. The entire question of
fertilizer pricing is under consideration by a committee and a solution is expected to
be found to this problem. Fertilizer plants that are linker to other plants like
chemicals, would be the safest best for investors. On the other hand, it is also
noticed that old plants in the fertilizer industry are desperately trying to diversify into
non- fertilizer areas. But this is the core industry and the long term demand for this
product will be buoyant.

                                           Would accelerate in coming years

The industry's performance has been moderately good; however tax has eroded the
gross profits of some of the big companies. Import duties on certain basic feed back
stock have been reduced which will result in revenue loss of Rs.26 crores. The excise
duty on certain plastic resins has been raised to yield Rs.165 crores in the budget.
Petrochemical products are in heavy demand and a lot are imported. Devaluation
has pushed up their prices and there is a demand supply gap. Many of the new
projects, unfortunately are not being implemented. So, the industry continues to
enjoy shortages and good profits. However, the capital cost of new plants is
extremely high and is continuously rising.
The outlays on new plants which are just commissioned or about to be commissioned
are in the region of Rs.3500 to 4000 crores. New plants which are still being
planned, will cost anywhere between Rs.5500 and 8000 crores and they involve huge
foreign exchange outlays for import of capital goods. The new plants may not
produce net profits for quite some time unless prices rise dramatically. Government
is also worried and has proposed that foreign exchange loans to the new plants
should be survived by exports. Thus, one may have a situation in which the stand
alone plants may not be viable. Therefore, new plants which are parts of existing
cash rich companies having high profits, will be viable. And one should be very
careful in relation to investing in new plants which don't have nay linkage with cash
rich streams of profits of existing companies.

                    Future lies in exports, where competition hots up

The industry has had a moderately good yea. In the domestic market, profits have
been good. The fortunes of the industry linked to the textile industry. Small scale
competition continues. However, the future lies in exports. Devaluation of Indian
rupee is going to boost exports but competition is emerging from other developing
countries. This is a mature industry with fluctuating profits. Most of the large plants
are old and written off and as such have to pay taxes depressing their net profits.

                                                                Exports picking up
The soda ash industry had a good year. Even though supply exceeds demand,
exports are picking up. No new entrants are announcing their intention to enter
because of high capital cost.

                                     Cost of membrane technology soars
Caustic soda has had an excellent year. demand is equal to or in excess of supply.
The installation of membrane cells in some old plants is in progress. As a result of
the devaluation of rupee in the two years, the cost of installing membrane
technology in plants has gone more than 50%. This means that plants that have not
converted to membrane technology, will now find it very expensive and very difficult
to convert and they may face a grave handicap. Devaluation has opened vast export
vistas for the industry and the industry has a bright future in the coming years.

                                          DPCO throttling industry profits

One finds that the industry has become a political football. The need to revise the
Drug Price Control Order.(DPCO) which has pegged the selling prices of
pharmaceuticals to uneconomic levels has become acute. More so since last year,
because the costs inputs has gone up in most cases, as they are improved. Thus a
pharmaceutical companies and large have shown low profits of losses in the domestic
market due to DPCO not being revised.

Units which are exporting are doing well, but are threatened by the change in the
patent laws. Presently they are benefiting from a loophole in our patent laws,
according to which product patents are not valid in India.

The multinationals operating in this industry are unhappy with DPCO. Some of them
have openly stated that under such adverse conditions, they are not interested in
raising their equity to 51%. The demand for the industry's products is growing, but
the DPCO is paralysing this industry's profits and progress.

Its future, therefore depends entirely on revision of the DPCO and it is hoped that in
the new free market economics which is sought to be established by the
government, a favourable decision will be taken so that pharmaceutical prices are
allowed to rise either under a totally decontrolled regime or a partially controlled

                                                             A moderate future
The industry has had good year. The excise duties have been raised in this budget
to yield Rs.25 crores. The slump in the automobile sector has depressed demand and
the industry has a moderate future.

                                                            Exports to the fore
This industry has had a good year. demand has slowed down due to industrial
stagnancy. However, exports are picking up in the specialised products.
                                    Excise burdens on a limping industry

The whole industry has been slowing down and the slowdown has been especially
dramatic after Oct-91. It is due to various factors as follows:

Depreciation in respect of automobiles purchased after October, is half that of the full
year. So purchases have tended to be bunched in the first part of the year.

There has been a rise in input costs and prices. A high interest rate and the credit
squeeze have tempered the demand for these products.

The increase in the excise duties last year and the high petrol prices have also
affected demand.

Commercial vehicles have witnessed severe recession, especially in the truck
segment. The two market leaders have done relatively well and are continuing to do

New Light Commercial Vehicle producers badly hit because they import a substantial
number of their components and devaluation has pushed up the prices. Despite this.
The Finance Minister has levied an excise duty on LCVs and has hiked it from 10% to
15% involving a burden of Rs.50 crores on this sector which has not been doing well.
This sector might now enter into a crisis situation, unless demand picks up.

So far as cars are concerned, demand crashed continues to do well and he is also
exporting. But the two private sector producers have really faced bad times. They
are nursing huge stocks and are facing losses. They have been lobbying with the
government for a cut in excise which has failed to materialise. One of the private
sector producers has at last got into a collaboration with a global leader of the car
industry. But production from such a venture is scheduled three years from now.
Therefore, the next three years may be very difficult for the two private sector
producers. As it is, production of cars is estimated to drop by 50% in relation to the
past three year period.

The demand for the two wheelers has gone down. Production of most units has
dropped drastically owing to increased inventory. The excise duty has been slightly
lowered on the two wheelers using upto 75CC. Engine capacity and has been raised
in relation to the rest of the industry. In fact, the budget has imposed a slight
increased the excise duties on the two-wheelers segment to yield Rs.30 crores.

                               Cartel pricing and exports help industry

The industry has had an excellent year. The budget has proposed an increase in
excise duty to yield Rs.40 crores.
The industry is dominated by four oligopolistic producers, who tend to work in a
cartel fashion. They are able to hold up prices and even increase prices.
Nevertheless, the supply is much is excess of demand, that exports have been the
salvation of the industry. The industry has achieved exports of almost more than
Rs.250 crores in the last year.

                                               Replacement demand is good
Surprisingly one finds that they have, by and large, had a good year. the original
equipment demand ie. The demand from the vehicle manufacturers has fallen, but
the replacement market has been buoyant in respect of good quality auto parts and
ancillaries. And the export potential for the industry growing rapidly.

                                                 Can pass devaluation costs

The industry had a good year. The cost of inputs like steel have risen sharply due to
the devaluation of the rupee but the industry will be able to pass on these increased
costs over the next year. some new plants which have been put up are very much
but are facing teething troubles. Demand, nevertheless, exceeds supply. The
industry has a good future for old top quality producers. One multinational giant has
entered the industry jointly with an industrial giant. The capital cost of this venture
is very high and it will take probably many years for to declare a dividend, or turn
the corner.

                            Telecommunication outlays will help jelly's

Power cables have had a bad year. the demand recession due to the slow down of
government spending has hit them but jelly-filled cables. ie telephone cables have
done well and will do better due to higher telecommunication outlays and their rapid

The import duty on copper has been raised in the budget to yield Rs.25 crores. The
excise duty on wires and cables has been raised to yield Rs.60 crores. The industry
depends on government orders and has cost escalation clauses which enables it to
pass on these new levies. The demand of this industry is substantially in excess of
supply and this is expected to continue. Therefore the steel industry has a bright
future, atleast for the next two to three years.

                                                        Next year to be better

The industry had a difficult year as its raw material, scrap, is imported and is
inadequately available even at high prices. Similarly, sponge iron prices are
squeezing the margins of the mini steel industry. The shortage of scrap is protected
to ease in the near future with availability of foreign exchange. As a result, sponge
iron prices have also softened from the peak levels. Next year should be better for
the mini steel industry, especially for those units producing high value products.
                                     Convertibility would buoy up sponge

Sponge iron units have prospered due to scarcity of scrap and the prices of sponge
iron were raised to almost Rs.5000 pert tonne. But now, prices of sponge iron have
started going down because of the better availability of scrap. 1992-93 will be a good
year for the sponge iron industry, as partial convertibility would increase the cost of
imported scrap and sponge iron prices perhaps may rise by Rs.300 to Rs.400 per
tonne. The Finance Minister has increased the custom duties on many iron and steel
items to yield a net revenue of somewhere in the region of Rs.160 crores. As the
industry is now decontrolled, prices are expected to rise after April. These duties
would be passed on to the consumers and will not affect the profitability of the

                                                     Devaluation aids exports

The aluminium industry is doing well and the devaluation of rupee has helped. Even
though supply has effected substantial exports. Power constitutes an important cost
of production and the market leader has been benefited because of having a captive
power plant. No new large capacities have been planned and the profits of the
existing producers should remain well protected.

             Yarn spinners do well; integrated mills flounder

The cotton textile industry had a very good first half year, but there was a dramatic
crash in profitability after Dec-91, because cotton prices shot up by over 75%, and
the prices of the finished products could not reach anywhere near the increase in the
raw material prices. Most of the integrated units have started losing money since
Oct-91 and the results of the second half will show a sharp downward trend in profits
of the cotton textile industry. The yearn units are also adversely affected but not as
much as the integrated units. Yarn producers profits have dropped in the second half
due to the flare in cotton prices, but they are still in a better position than
integrated mills because they sell to the decentralised sector and are also exporting
at fairly lucrative prices. Exports to the former Soviet Union have dried up

                  Competition and devaluation curtail profits
Severe competition continues in this sector. There is a demand recession due to
tight money and high interest rates. Television, radios, videos etc are in depressed
markets. Devaluation has pushed up the cost of the inputs which are largely
But some items offering the latest technology and quality products are doing well.
Some new items have come in, like microwave ovens, washing machines etc, which
may have niche markets. So far as the computer industry is concerned, the industry
has been hit by devaluation of the rupee because it depends largely on imported
components for its production. Small companies are hit by fierce competition from
global giants. A number of global giants have entered the field and their sales are

The profits in computer hardware are fairly low because of competition. Software
development and exports still offer good scope for large units linked with global

                                New technology coming

The industry is very competitive. There is a demand recession due to high prices and
tight money conditions. Technological change is occurring here. Thus, no frost or
frost-free refrigerators and new types of air conditioners with latest silent, and
energy efficient compressors are about to be launched.

                                          Sings of inventory accumulation
The industry has had a good year. it has raised prices. But imported raw material
which constitute 25% of total raw material, are costing more because of devaluation.
In recent weeks, demand has been softening. There are signs of inventory
accumulation and prices could soften.

                                                        Share prices too high

Last year's occupancy rates were poor. But the devaluation of the rupee and the
partial convertibility, may result in a rise in foreign exchange earnings of these
hotels. But the share prices of hotel companies have shot up to very high, almost
unrealistic levels, which make them unattractive.

                                                 Russian exports to pick up

Tea has had a good year even though the Russia market has slackened. But trade
with Russia will resume, exports are spurred by devaluation and domestic is growing
quite rapidly. Coffee has had a bad year but could improve later on.

                     Profits may double every three years
The food industry has had a bumper year. the leading companies, linked with global
giants, have had excellent growth in their sales and will show dramatic increase in
profits. Demand for top quality products is growing at a sizzling rate of between 25-
30% per annum and margins are holding up. In the case of top quality food
companies, profits may double every three years, which may justify high P/E ratios.
The industry is also favorite of the government, which has a separate ministry to
look after it and therefore it has strong growth ahead.

But in this industry do not invest in small poorly managed companies having no
brand leadership. There are a few companies which are managed well, which are run
by global giants and which will show spectacular results in the next three years.

                                                                Share prices puffed up
Cigarettes have had a good year. the budget has increased the excise duty them. He
burden of excise duty is Rs.325 crores. The excise duty will be based on the
consumers. The industry is dominated by affiliates of global giants __ diversifying,
just as the tobacco industry is doing in all parts of the world into other lines like hotel
and foods. It still has excellent export growth potential. Share prices of companies in
this industry have exploded to levels at which one must question whether they offer

                                                      Long term outlook cloudy
Profits will increase due to the partial convertibility of the Rupee. Shipping companies
were not getting the Exim scrips in the earlier period and to the extent that 60% of
their foreign exchange earnings will now be saleable they will benefit. But a warning;
the shipping freight rates have started softening. The Baltic Freight Index which had
jumped to almost 1,700 has been slowly sliding down and is now approaching 1200.
Therefore, the long term future, is somewhere what cloudy. May be we are the top of
the shipping cycle. Profits in this industry have often been made more by buying and
selling ships than in running them! So please be careful before buying shares in this
industry. Watch the Balance Freight Index.
Part 3: Long Term Investment Strategy………………

A detailed analysis of the stock market action is required to
understand what has happened in the light of the budget
presented in Jul-91.

On Jan2, 91, the BSE Sensitive Index (hereafter called sensex) closed around 1000.
Then between Jan. and Jun,91 it saw a low of 947 and a high of 1344. In Jul.'91, the
sensex fluctuated between 1679 and 1251. The Sensex in pre-budget session stood
at 1459 in Jul.91. after the budget it was 1600. Thereafter, between Aug-Dec,'91,an
interesting pattern emerged ,as the Sensex tried to cross the 2000 mark. In Sep.'91
it rose to a high of 1981. In November to 1995 and in December to all three times.
The low during these months was 1598. It had taken the Sensex twelve months to
try and climb from 1000 to a little below 2000.

In the year 1992, the Sensex fluctuated between 1973 and 1960 on2 Jan.'92, Again
for the first two weeks of January, the Sensex struggled to break this barrier. Then,
from 16 Jan.'92, there was a straight run from 2024 to 2329 on 31 Jan.'92, thus
establishing a breakout. More interesting, from 1 Feb to the pre-budget session of
the stock market, the Sensex soared from 2329 to 2830. The Sensex in the post
budget session rose to 3017 and further in tow days it jumped to 3472. This
indicates a jump of 500 points (from 2830 to 3472) in three sessions of the stock
market. This, is in technical language, known as buying panic. It has occurred rarely
in other parts of the world. Buying panic means that in three or four days the index
jumps perpendicularly, as everybody including the institutions are paralysed because
everyone wants to buy and no one want to sell. It is for the first time in the history
of the BSE that a buying panic of this magnitude has occurred.

The price earnings ratio, as published by the BSE journal in Jan.'91.was around
sixteen. InJul.'91 it varied from twenty-one to twenty-five by Jan.'92. At the pre-
budget session it was between thirty four and thirty six. In the last four days
succeeding the budget, the ratio jumped to a level of forty-one to forty-four. This
shows that irrespective of the rise in profits, the P/E ratio also jumped wildly.
Another indicator that should be mentioned is the price to the book value of the
shares. It is now more than seven times. Further, dividend yield has fallen to less
than 1%. This shows that, in relation to the historical worth of shares, the prices
have jumped to absurd levels. Seven times book value is no level at which a market
should trade.

Now, does his conclusively mean that the market is highly- over-budget? For long, it
was thought that only the fundamentals influence the stock market pricing. Recent
research shows that the prices are determined by three factors. The first factor is
fundamental and has a 40% weightage. The second is the demand-supply equation
for shares which determines the market prices to the extent of another 40%. And
the third factor, called the X-factor, determines the remaining 20%. The X-factor
reflects the psychology of investors and their attitude towards investment in shares.

The normal P/E ratio for India, is prevalent in many parts of the world, to give value
to the investor and fundamentalist, should be between fifteen and twenty times the
earnings. Normal prices to book values should be between one and two-and-a- half
times the book value.
Changes in Government policy, especially the shift from the socially controlled
economic pattern to a free market policy, cannot justify the extremely high ratios on
a fundamental basis. It is true that in some countries the P/E ratios are high. In
Japan and in Taiwan it is supposed to be between thirty-eight and forty. In
Indonesia, prices rose steeply after liberalisation, but they experienced an equally
steep fall.

The net profits of the industries would have to jump by 100-300% to justify these
ratios. This is unlikely in the coming two or three years. Therefore the prices are
over-optimistic and discount the profit scenario perhaps as has upto 1995, which is
unhealthy involves a very heavy risk.

Let us now consider the technical demand position in the market. It should be given
a 40% weightage. Under the demand-supply scenario stated in the following table.

Guidelines have been issued by SEBI for the formation of private sector. Mutual
funds. They have been put on a level playing ground with public sector Mutual
Funds. This is a welcome measure. There is a terrific rush to enter this sector------
somewhere between eight_ hundred applications have been filed in SEBI to enter
the mutual fund industry. SEBI should very carefully examine these applications and
ensure that the desirable or inexperienced individuals must enter the private mutual
fund industry as that will mar the reputation of the industry. As also its future
growth. Nevertheless competition will emerge in this field but, the entry of private or
joint sector mutual funds (when they come) will be good for mobilising an additional
flow of funds into the market. This flow is estimated at Rs.6000 crores in the table

The budget has been called 'golden' by NRIs. They are allowed to legally import gold
after paying an import duty of Rs.45 per ten Gujarat Ambuja and they ca import gold
upto five kg. They are further allowed to purchase property and shares under FERA.
This is good for the stock market. A red carpet treatment given to NRIs is bound to
result in the flow of their funds into the markets, estimated at Rs.2000 crores. The
India Development Bonds and other schemes have mobilised around Rs.5000 crores.
And investor response to the primary market may be around Rs.10000 crores. Thus
total demand for shares will stand around Rs.23000 crores.

The Finance Minister has said that the government control over capital issues is
proposed to be removed as also the premium fixation. The premium are to be
determined not only by market forces, but also, by the attitudes of merchant
bankers, and company managements. Therefore, we have a competitive situation
which is welcome. This will increase he liquidity of the new issue market, which will
grow rapidly from last year's figures of Rs.6500 crores around Rs.1200 crores.
The Finance Minister has sold Rs.2500 crores worth PSU shares in packets to mutual
funds, TUI,LIC and the public sector banks. Their listing might result in the slaughter
of thousands of investors. It is absolutely essential that all the relevant data about a
listed PSU (its past and present) should be made available to the investor. In short,
all the details that a private sector company is forced to give, reveal and make
public, through a prospectus, should also be given by the PSUs (atleast in an
abridged form). Only then can the investor gauge whether the prices at which the
shares are offloaded (by the mutual funds) to them is fair. Though some PSU are
claiming to have got listed at the Delhi and Jaipur Stock Exchanges, not a shred of
information is available on them there. All PSUs which get listed at BSE should be
treated on par with other companies and all the rules of listing should apply to them.
It is also desirable that the mutual funds should start disinvesting the PSU shares
(Which they have got at cheap prices) at market rates. Provided one assumes that
around Rs.6000 crores worth of PSU shares would thus flow in, and along with other
mutual fund sales of Rs.3000 crores and investor sales of Rs.2000 crores, one
arrives at a supply figure of Rs.23000 crores.

Thus we arrive at a supply-demand equation of Rs.23000 crores. This is under the
assumption that there will be an even flow of new issues over the months. But if in
case, new issues are delayed by say six months, due to indecision or lack of CCI,
demand for shares resulting in a flare up in prices. Similarly, there should not be a
delay or absence of disinvestment of PSU shares by the mutual funds. If all goes
well, one may get an evening out of the demand and supply in shares in which case
the markets may not get overheated.

The X-factor, which is the third factor, is the psychology of demand. Just now the
public euphoria is tremendous. New government policies are making everybody see
a rosy future. The budget and the government statements encourage people to rush
into shares. But nay setback could make this bull run come to a stop. The public, in
event of setback, a drought or some other cause will turn away from the market.

In my earlier lectures I had given several points for selection of
quality shares and those points are still valid. I now add some
further points for investment strategy in the coming year:

 There is a great risk in the market now. Please adopt a very cautious approach.
 Begin to sell over-valued stocks where huge profits have accrued.
 Raise cash to 30% of the value of the portfolio. Sell upto 30-50% of the
    individual portfolio. Failure   of monsoon or drought will lead to a crisis. Buy
    shares very cautiously.
   Give top priority to FERA shares. This is because the flow of funds from foreign
    mutual funds will tend to be invested in such companies. Also the FERA Act has
    been amended to give such companies freedom to expand. But property and use
    international brand names. These are very great advantages.
   Avoid issues of small companies having unkown managements. Avoid issues of
    finance companies run by people with no track record. Avoid units of mutual
    funds launched by managers without a past track record.
   Watch the macro factors operating in the economy and take a long-term view of
    them while buying shares. What goes up very fats falls down at a faster rate. Be
    very careful while buying PSU shares. Get all the past data. The PSU will be
    privatised only to the extent of 49% as per present announcements. Government
    plans to hold on to 51%, even over the long term. Therefore the management
    won't change overnight.
   Concentrate on shares with high credit ratings, by utilising the ratings of the
    credit rating companies. Avoid companies with high debt, especially debt in
    foreign currency loan as devaluation will hit the harder in terms of repayment.
   Do not rely on tips. Buy shares after doing own research.
   Sell shares where the P/E ratio is more than 100, unless profits are expected to
    jump up quickly by 400 to 500% due to some special or abnormal factors.
   Do not be fooled by replacement value theories to justify high share prices.
   Be careful of the turnaround situations. The idea that yesterday's failure of sick
    companies is definitely tomorrow's success is an unsound idea. There are many
    sick companies that don't turn around. There are some investors who believe that
    if there are any shares that are trading below par, they should be bought
    because at sometime they must turn around. No such thing may happen.
   Do not invest on the greater fool theory. In bull markets, investors knowingly
    buy a share at a very high price, expecting to find a greater fool who will buy it at
    still higher price. This is a very unsound method of thinking.
   Do not follow so called model strategies on investments which recently have
    started circulating and which are written by theoreticians who have not any idea
    or experience of the stock market. It is difficult to predict the market movement
    of one year ahead. So do not believe in theories predicting market trends into
    future decades.
   In   volatile markets timing is critical. Be much more active in such a market.
    Watch political developments in relation to the market. Watch the badla rates and
    the technical position of the market and the trends into future decades,
   Be alert in cutting losses and booking profits. Do not attempt to sell at her very
    top price and buy at the lowest price-----------that is impossible in the long term.

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