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Market appears to be out of touch with ground reality

The rally in the stock markets has never seemed more removed from reality.

The rally in the stock markets has never seemed more removed from reality. The Sensex is now at its highest since January 6, 2011, but the news from industry is getting worse.

Strapped for cash, the BHEL chairman has intimated the PMO that it is cutting back on capacity utilisation by as much as 60-70%. That is an unbelievably big retracement, but the engineering major has apparently indicated to the government that it isn?t able to collect all its receivables and, moreover, that inventories are piling up even as the order book shrinks.

It?s not just the capital goods space that seems to be in trouble. On Monday, Tata Motors announced what must be its fifth shutdown at the Jamshedpur plant this year where it makes heavy trucks with the management ostensibly not wanting to keep a tight leash on inventories.

Also, GVK confirmed it had terminated the concession agreement with NHAI for four-laning the Shivpuri-Dewas section of NH3 just as GMR had done earlier for the 555 km Ahmedabad?Kishengarh highway.

Given that matters are now in the Supreme Court, unless the government acts quickly and decisively ? the newly set up Cabinet Committee on Investments ? these projects are unlikely to be resurrected in a hurry.

If that wasn?t enough, Moody?s reminded us on Monday of how grim the situation in the power sector is; the rating agency assigned a ?credit negative? to Tata Power?s Mundra power plant, saying losses would increase as more units started generating power.

Indeed, the economics of the Mundra plant has gone so awry after the rise in the imported price of coal that the business could continue to bleed as generation goes up.

Of course, neither capital goods stocks nor those of power companies have being doing well; in the last year, the Tata Power stock has gained 10% to Sensex?s 23%, while BHEL has lost 14.5%. NTPC has lost 7%, while Adani Power ? which, too, is grappling with higher coal prices ? has lost more than 21%.

But the rally in the markets is nonetheless surprising given that confidence levels in industry can?t be very high if new project starts in the three months to December fell 76% y-o-y and if factory output between April and November 2012 was up just 1% compared with 3.9% in the corresponding period of 2011.

The case being made out is that industrial growth may be bottoming out; as Rohini Malkani at Citigroup points out, the three-month moving average for the IIP shows growth at a more robust 2.5% compared with near-zero levels earlier, more in sync with the PMI data. What?s also working for Indian manufacturers is that prices of commodities are softening ? that seems to have been partly reflected in the easing core sector ? non-food manufactured products ? inflation data for December of just 4.2% from 4.5% in November.

Of course, lower core inflation could mean companies aren?t commanding the kind of pricing power they used to and need a helping hand.

Given that consumer inflation is a frighteningly high 10.56% and could probably head higher ? once the railway fare hikes are taken into account ? its unlikely the Reserve Bank of India (RBI) would rush to cut policy rates by 50 basis points. But if investors are playing for a 25 basis points cut, that?s clearly possible.

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First published on: 15-01-2013 at 00:22 IST
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