Wise Man Morgan

While the 1.5 percentage point cut in weightage announced by MSCI will not

have a significant impact, the real issue is the focus on liquidity in the scrips, and in the markets

The latest round of changes in the Morgan Stanley Capital International (MSCI) indices have graduated from a mechanical quarterly revision to an investment philosophy.

Earlier, the index was a simple chain-linked computation of market capitalisation of scrips in the index. Since it was largely based on past market performance of the companies, the changes were predictable. The underlying information was already available, and it would be an odd investor who would want to run a portfolio of scrips in the same proportion as the market capitalisation. In effect, the investor would be replicating the country index -- the Sensex and S&P CNX Nifty also operate on the same principles. Except for the surprise addition or deletion of scrips, the MSCI index meant little to an institutional investor or to the markets.

 

Moreso in the Indian case. The MSCI Index is widely followed by the emerging markets funds who invest in India. But these account for less than one-third of the total FII inflows into India. The bulk is made up of India dedicated funds. Hence the 1.5 per cent reduction in the India weightage from 9.08 per cent to 7.45 per should have a minimal impact on FII portfolio inflows into India.

The real issue is that by elevating the "investability" factor to the exalted status of a key parameter, MSCI has re-scaled investment philosophy. Investability simply means that there should be enough floating stock in the market so that an investor --particularly the deep pocketed global investor--can move in or out of the stock without significant change in the price.

Too many investors had forgotten this golden rule in their mad rush for high performance stocks.

MSCI says it wants to make the Index a little more practical and usable to institutional investors. The reiteration of the rule is also important because investors find themselves in a jam now, all having rushed in at the same time into ICE stocks. This had led to a massive appreciation in stock prices, closely resembling a bubble, but now almost all investor find themselves unable to exit without trashing the value of their investment.

While Wipro is the most obvious example of this genre, MSCI investability parameter would also refocus attention to the overall liquidity in key country markets, as also the operational procedures which make investor entry and exit possible at all times.

As global investors make cross country comparisons, irritants like circuit filters and applicability of a wide gamut of trading margins would load the dice against India. Existing India dedicated funds have already factored in these issues. The potential entrants would think twice before seeding a dedicated India fund. The free floating types would find other countries in the region much more congenial to investments.

The second issue raised by MSCI pertains to cross holdings, the preferred Asian model of routing investments. Reliance Petroleum, for instance, which is now into its first year of operations, has been dumped out of the index because its parent, Reliance Industries holds a significant chunk. So also, a lot of companies in Asia have been penalised. Perhaps a closer understanding is called for. The complex maze of cross holdings has come about due to the tax structures, and the fact that large investments could only have been seeded by successful parent companies.

Tisco seems to have surprised most analysts by reporting a 50 per cent rise in net profit for the year ended March 2000

Tisco seems to have surprised most analysts. The company reported a 50 per cent rise in net profit to Rs 422.59 crore for the year ended March 2000, beating most analyst estimates of a net profit in the region of Rs 350 crore. Apart from the strong dose of extraordinary income arising from the sale of the cement unit, the higher net profit can be attributed due to a better product mix, cut in production costs and an overall increase in sales realisations.

Tisco reported a 10 per cent rise in net sales to Rs 6,890.4 crore compared to Rs 6,274 crore in the previous year. During the year, export sales increased 16 per cent to Rs 740.15 crore. On the operational front, most analysts point out that the company had been finally able to turn the corner.

Between April 1999 and February 2000, Tisco has been able to cut its hot rolled coil costs to $ 157 per tonne from the earlier $172 per tonne. The company has also increased its continuous casting from 73.6 per cent in the previous year to 94.9 per cent. Also, the company increased the production of flat products to 61 per cent compared to 50.60 per cent in the previous year. During the year, the company has also been able reduce the product mix of longs to 24 per cent from 30 and semis to 15 per cent from 19.2 per cent in the previous year.

All these measures have helped the company to post a higher operating profit margin. Tisco's operating margins improved to 17.90 per cent from 14.93 per cent in the previous year. But rise in interest cost is a disappointing point. Tisco's interest cost during year was up 36 per cent to Rs 356.96 crore.

Significantly, Tisco has offset the profit of Rs 125.26 crore from the sale of cement plant against its outgo of Rs 157.99 crore for voluntary retirement scheme. This has cut Tisco's employee strength to 52,167 at the end of March 2000 compared to 78,669 in 1995.