Market Matrix - The GDP growth and the corporate profitability – 30 Sep 2006

Gentlemen,

The govt just announced that the growth in GDP for the five months ended Aug 2006 have exceeded 8% mark comfortably. In these five month the tax revenue is up by 39% and non tax revenue is up by over 15%.These numbers are really interesting and leave one wondering whether the stock market would be gaining strength on the back of these numbers, I am not so sure. No doubt, the increased tax collection would enable govt to contain fiscal and revenue deficit and this is something that gives comfort.

Since the quarter ending 30 Sept 06 will only be a quarter and the numbers it gives will be for the growth over the corresponding quarter last year. The gullible public is given or gets the impression that this growth is over the growth of 1st quarter in current year. What I mean to say is that even if the rate of growth shows slight improvement in this quarter against the growth numbers for the first quarter (both over corresponding quarters last year) it should not be taken as signal for the still better next year for the corporates.There always remains a possibility of slips between cup and the lip. I am not talking dejectedly; I am talking as the dream run has been going on for far too long. If you account for the returns by way of the nominal interest return of 8% on capital plus if you expect just two percent additionally for the element of risk involved in equity investment, the projected Nifty would have to be between 3950 to 4000 and the Sensex between 14000 to 14200. One year from now and it will have to be 4200/15000 after next financial year i.e. 31st March 07.

I call upon you to be optimistic and assess if these numbers seem possible to you. The ones who have doubt should keep the moneys in interest bearing instruments in the proportion of their doubt in this regard.

I am only trying to make matters simple for the uninitiated. I further state that the tax revenue growth cannot translate for the existing listed companies in to more than 25% net profit surge on an average for every incremental rupee of profit. The tax rates are at the highest hence would restrict the PAT .This reflects in higher PE ratio than otherwise would have been the case. Therefore, those who expect that next year would be bringing down the PE ratio for the indices are in the wrong, this year it rests at over 20 against 18 last year in spite of surge in profits. The PE ratio at over 20 is non-digestible for me personally; I cannot speak for others with authority.

The Nifty closed at 3588 after crossing 3600 mark for some time on 29 Sep 2006.

Hari Om

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