Posted by: John Elliott | October 16, 2007

Rich valuations for players in Mumbai’s bull market

India’s stock market is “in the middle of a mania”, says Manish Chokhani, executive director of Enam Securities, one of Mumbai’s leading brokerages. “It’s stupid days in India – a bubble zone,” he told me this morning, commenting on the 30-stock Bombay Stock Exchange’s Sensex index rush past 19,000 yesterday. That was a rise of 1,000 in five trading days, the fastest ever, and over 3,000 points higher than a month ago – all record highs driven by massive inflows of foreign money totaling some $7 billion over the past month.

I had rung Chokhani to ask whether it was despite (or because of) such inflated bull market prices that Nomura, the Japanese investment bank, was reported to have withdrawn from talks to buy a substantial chunk of his firm. Nomura declined to comment on the reports, which are well founded according to Mumbai sources, and Chokhani would neither confirm nor deny that Nomura had made a bid and had now withdrawn.

Chokhani also would not comment on rumors that Enam’s price had been too high for Nomura, but he did say that the firm was worth well in excess of $1 billion, judging by a recent $700 million IPO valuation on Motilal Oswal, a smaller Mumbai securities firm.

There has been a big foreign rush to grab a slice of the action in Mumbai as prices have soared. Big names like Merrill Lynch (MER), Morgan Stanley (MS) and Goldman Sachs (GS) have had local relationships for many years, though these have changed with time. In February, Morgan Stanley bought out the 50% stake held by its partner, JM Financial, in a brokerage joint venture. Standard Chartered, Lehman Brothers (LEH), BNP Paribas, and various private equity firms including a Citi (C) venture capital fund, have been involved in smaller deals.

So the market was watching Nomura’s courtship of Enam to see what would happen to such a prominent firm – it was involved in mobilizing over $24 billion institutional and retail funds for share issues in 2006-07, leading the market with a 25%-30% share. Now that this deal appears to be off, the next marker is an imminent IPO by Edelweiss, another leading brokerage and investment bank, which is expected to be valued at well over $1 billion.

With such figures around, it seems that Mumbai’s leading brokers find it difficult to fade away. Hemendra Kothari, the doyen, still plays a leading role as chairman in DSP Merrill Lynch, a relationship he started building 20 years ago. Nimesh Kampani, chairman of JM Financial, one of Mumbai’s top two firms, is rebuilding his business following the Morgan Stanley buyout.

As market activity escalates, people such as Vallabh Bhanshali, the chairman of Enam, would probably rather retain control than sell their souls and their future to a foreign bidder – especially when rocketing valuations can make today’s prices look silly tomorrow. Enam has in the past been pursed by Rothschild, J.P.Morgan, and Lehman as well as Nomura. “We are very wealthy people and have no reason to sell,” said Chokhani, adding that Enam would rather broaden the base of its ownership to include staff than sell to an outsider.

Foreign money has no doubt been attracted into the market in recent weeks by the prospect of India’s proposed nuclear deal with America, which would have stimulated business between the two countries. But it did not seem to be too worried that Manmohan Singh, the Indian prime minister, confirmed in a phone call to George W.Bush on Monday that the deal would not be going ahead in the foreseeable future because of a lack of political support.

Lehman offset that news today by saying that India’s economy has the potential to grow at 10% or more over the coming decade, with the equity market outperforming other developed and emerging market indices over the next five years. That is good news for the Mumbai players.



  1. @Steve:

    No offense meant, but that’s quite a frustrated looking outburst! Mate, although I don’t disagree that we might’ve just about started entering bubble territory in the Indian markets, your comments are way, way off mark.

    The (trailing and forward) PEs of the combined 30 stocks that make up the Sensex (at about 20 times FY09E EPS) are still below historic highs. What’s better, the PEG ratio (PE to earnings growth) is still less than unity, considering the listed universe of Indian stocks have grown in excess of 40% (forty!) for the past four years, and expected to keep growing in excess of 15% for the next ten years. Heck, the GDP itself (which for the most part still consists of slow-and-unexciting agriculture) is expected to grow at 9-10% (in real terms, i.e. accounting for inflation) for the next ten years.

    That’s next only to China. And India, being a democracy, unlike the single-party communist dictatorship that China is, must command a premium valuation if anything.

    What “hype” are you talking about? Indian companies have been making record profits for four years and will continue to do so for the next ten. The entire subcontinent is transformed.

    What “hype”? Hindalco bought Novelis for USD 6 billion. Tata Steel bought Corus for USD 10 billion. In hard cash. These are facts, not “hype”!

    Look at Brazil. Look at China. Heck, look at abysmal countries like Bangladesh and Pakistan (where inflation has been growing at a higher rate than the GDP!). Now those are what I call irrational bull market bubbles that will (and must) burst. Not India, by any stretch of imagination.

    But you’re right, we’re just about getting into bubble-mode. New (and naive) foreign money is flowing in by the billions on a weekly basis. But it’s not quite euphoria yet. If past bull markets are any indication to go by, this bull market will also end in excesses.

    It’s the time to enjoy the ride as Indian assets (Indian equities, real estate, etc) get rerated higher … whatever you do, just don’t go short on India or you might end up losing your shirt! Raging bull markets have a reputation of blowing away pessimists 🙂


  2. Yes it does look like the next bubble is India (albeit smaller than China). In my opinion we probably in the middle of innings of a bubble, like dot-com in 1998, and US housing in 2005 and before its all over in maybe 2010 will likely be above 30,000 on the sensex!

  3. India’s stock markets are in a classic bubble. Fueled by hype, more hype and questionalble statistics, the markets in India are defying gravity. Hot money from overseas is now in full investment mode. The markets are an inch deep and a mile wide. Does anyone remeber the Asian economic bust, the dot com blow-up and even tulip mania. Just wait fans, India’s stock market will fold like a wet kleenex when the next set of bad news hits the world economy. Oil at $100 may do it.

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