India should reduce rates further

India needs to cut interest rates further as two reductions in less than a month haven't been enough to make loans affordable for companies and consumers, Bimal Jalan a former central bank governor said.

Policy makers should lower benchmark rates further "if necessary" to enable banks to cut their loan rates, Bimal Jalan, the top official at the Reserve Bank of India from 1997 to 2003, said in an interview in New Delhi.

Measures taken by the central bank and the government in the past month have helped bring the crisis "under relative control."

The global financial crisis has led to a shortage of money in India's banking system, affecting lenders' ability to extend loans to companies and individuals.

That's eroding consumer demand and has prompted production cuts at companies including Ashok Leyland, the nation's second-biggest maker of commercial vehicles, and JSW Steel Ltd.

Demand for domestic loans increased after funds dried up overseas following the seizure in credit markets and the collapse of Lehman Brothers Holdings Inc. on September 15. State Bank of India, the country's largest, cut the rate it charges its best clients to 13 per cent last week from 13.75 per cent, the highest in a decade. ICICI Bank Ltd., the second biggest, hasn't reduced its 17.25 percent charge.

"We need to create conditions so that loans are available at interest rates at pre-crisis levels, as other sources of finances have dried up," said Jalan, 67. "I am in favour of further reducing the cash-reserve ratio and the repurchase rate, if necessary."

Slower growth
India's $1.2 trillion (Dh4.4 trillion) economy may expand at the slowest pace in four years, the central bank estimates, as the credit crisis tips the world's industrialised nations into a recession.

Larsen & Toubro Ltd., the country's biggest engineering firm, said its borrowing costs will climb in the next six months and DLF Ltd., India's largest developer, last week said its hotel venture with Hilton Hotels Corp. may be delayed by up to 18 months as it tries to secure funds.

The benchmark Bombay Stock Exchange Sensitive Index has declined almost 50 per cent this year on concern slowing demand will hurt companies' profits.

India's central bank cut its benchmark repurchase rate by 1.5 percentage points in two stages starting October 20 to 7.5 per cent from a seven-year high of 9 per cent. It also lowered the amount lenders must set aside as reserves to cover deposits by 3.5 percentage points in a month, freeing up as much as $29.5 billion in cash to ease lending.

"The action taken by the Reserve Bank seems to be absolutely appropriate," Jalan said.

Right time to invest in stocks

The recent carnage in the stock market has seen major indices losing more than half their peak values. By the first week of November ’08, the Sensex had fallen by 52.3% from its peak of 21,206.8 in early January ’08. The Nifty lost nearly 53% during the same period. While investors are concerned about the future performance of the stock market, they appear to be less familiar about an interesting fact. The market crash has resulted in stock prices falling below the book value of companies in most cases.

Book value represents the value of a company’s assets net of its liabilities. In other words, it tells what you will be left with, if the company were to shut down, its assets sold and liabilities paid off.

So, logically, a company that is a viable profit-making business will always be worth more than its book value due to its ability to generate earnings and growth. Hence, shares trading below their book value are a sure sign of gross under-valuation and indicate low risk for investors.

An analysis of BSE 500 stocks reveals that one out of every three stocks is currently trading below its book value. A sample of 479 companies with latest book value information was selected for the study from the 500 companies that comprise the BSE 500 index. The stock prices of these companies were then divided by their respective book values to arrive at the price-book value ratio (P/BV).

According to the study, as many as 170 companies reported stock prices lower than their book values. Interestingly, on January 21, ’08, the day when the market temporarily halted trading due to massive losses, only 26 companies out of the sample set were trading below their book values.

The study also revealed that as on November 3, ’08, nine out of 10 companies were trading at P/BV multiples which were lower than their value on January 21, ’08. Real estate companies dominated the list of companies that saw erosion in their book values during the said period. Among the top 10 such companies, five were from the realty sector.

There are two reasons for this erosion in P/BV. Not only have stock prices of companies fallen sharply, but in many cases, the book value has also increased. Every four out of five companies reported a jump in book value between January ’08 (BV in FY07) and November ’08 (BV in FY08). Investors can use the information on P/BV multiple as one of the decisive indicators while taking investment decisions in a falling market.

A P/BV multiple of less than one reflects lower risk for investors in case the company faces bankruptcy. Further, talking about stock recommendations by ETIG, some stocks have seen a considerable decline in their current P/BV compared to that on January 21, ’08.

Aban Offshore, Allied Digital Services, Bank of India, Adhunik Metaliks and Jain Irrigation are some of our recommendations that have seen a drop in their P/BV multiples, which are now between one and three. Moreover, India Glycols and Ratnamani Metals & Tubes are currently trading at P/BV of less than one.