Investors? choice

The Bata stock went up by 14.9 per cent last week, after the announcement of its financial results. The company did in fact manage to get back in the black in 2005, with modest earnings per share of Rs 2.07 against a negative Rs 12.20 in 2004. Sales for the year were more or less flat, the profits coming from a 6.7 per cent squeeze in expenses. The results for the December quarter were better, with net sales up 8.3 per cent compared with the same period of 2004, and expenses down 6.4 per cent. Earnings per share for the December quarter were 56 paise. Actually, Bata India's turnaround happened a few quarters ago ? EPS in the September quarter, after the equity dilution due to its rights issue, was 53 paise. The real improvement lies elsewhere ? in the fact that net receivables were much lower and days? outstanding reduced. Going forward, that should improve sales growth.

There?s little doubt, however, that the spurt in the stock is the result of investors salivating at the prospects of the returns from the development of the company?s real estate at Batanagar. Other companies with real estate holdings have shown a similar jump in their stock price ? Bombay Dyeing went up 21 per cent last week, while Century Textiles was up 13.7 per cent.

These examples show that companies are now being valued not only on the strength of their operations but also on the real estate they command. This is what Credit Lyonnais strategist Christopher Wood had to say in a recent issue of Greed and Fear, the brokerage?s newsletter: ?(The) base case remains that the present Indian bull market will climax eventually in extreme overvaluation with stocks rerated on their landbank holdings, as happened so spectacularly in Japan in the late 1980s and in the rest of East Asia in the early 1990s. The reason the same phenomenon will, in due course, hit India is precisely because it has never happened there before. All this means that investors should not only pay attention to earnings issues when they look at Indian companies. For asset values will also become increasingly important as the bull market matures.?

Balance of payments

The Balance of Payments data for the December quarter show a current account deficit of $3.85 billion, well below the $5.05-billion deficit for the September quarter or the $4.56-billion deficit for the June quarter. The widening of the current account deficit had caused much anguished hand-wringing, because it would slow down the build-up of foreign exchange reserves and would thus hurt domestic liquidity, resulting in an upward pressure on interest rates. The trade deficit improved to $12 billion from $14 billion in the previous two quarters, mainly because non-oil import demand slowed down, while export growth continued. The net inflows on account of invisibles were actually lower than in the previous two quarters, despite reinvestment of part of the redeemed India Millennium Deposits, possibly because of interest payments on the IMDs.

But the improvement in the trade balance was negated by capital outflows. On the capital account, there was a net outflow of $0.6 billion in the third quarter compared with the net inflows of 9.8 billion in the second quarter. So the deterioration wasn't entirely due to the outflow of $5.5 billion by way of IMD redemption. Forex reserves accordingly fell during the quarter, resulting in pressure on liquidity.

It?ll be interesting to watch out for trends during the current quarter. As on March 17, foreign exchange reserves were higher by $8.9 billion over the level at the beginning of the year, although part of that could be valuation adjustments. That seems to agree with the RBI?s view that the current pressure on liquidity in the debt market is a temporary blip. Unless, of course, the dollar inflows slow down.