The Sensex has crossed another milestone, but the mood in the markets is different from earlier peaks such as the 10,000 mark. To start with, adding 1,000 points on a base of 14,000 is an increase of just 7%. More importantly, just a few stocks such as Reliance Industries and Bharti Airtel have driven the current rally. Among the 30 Sensex constituents, 17 stocks are at lower levels compared with the 14,000 mark.
Interestingly, even compared to the 10,000 mark (January 2006), while the index has risen by 50%, a majority of the constituents have fallen in terms of valuation. Data is available for 29 Sensex companies, and 19 of them (nearly two-thirds) have seen a dip in trailing price-earnings (P-E) ratios.
Of the 10 companies that have seen an increase in P-E ratios, HDFC, HDFC Bank and ONGC have seen a marginal increase. In HDFC’s case, for instance, the trailing P-E has risen from 28.5 times in January last year to 30.9 times currently.
These 10 stocks have contributed 76% of the rise in the Sensex’s market capitalization. Cases where there has been a radical re-rating include Reliance Industries and State Bank of India (SBI). Reliance’s P-E ratio has nearly doubled to 21.9 times, from 11.3 times in January 2006, and SBI’s has risen from 10 times to 18 times. In most other cases, the increase in market cap has either been in line with the rise in earnings or lower. This seems to indicate that the euphoria in the market has reduced. But what also needs to be noted is that the outlook on earnings has also changed. Last year, year-ahead earnings were expected to grow by over 30%; now, many analysts expect earnings to grow by less than 20%. The drop in valuations, in effect, is a reflection of the change in earnings outlook.
One of the big objectives among state-owned banks has been a reduction in their bloated staffing levels. Reserve Bank of India (RBI) data shows that in spite of a huge increase in business, these banks have succeeded in reducing the number of employees.
The SBI group, for instance, had 294,121 employees on its rolls in March 1990, which went up to 306,198 by 2000. By March 2006, however, that number had dropped to 259,744. That’s a drop of 15% in six years. Nationalized banks too saw a drop of 16% over the period in their employee strength. Was this fall made up by the rise in the numbers of staff in foreign and private banks? Not really, because the total number of employees in scheduled commercial banks fell by 106,507 or 10.5% between 2000-06. Of course, much of the work in the private banks is outsourced.
The number of clerical staff has fallen the most, while officers have actually increased. But the babuculture in state-owned banks ensures a large number of peons, sweepers, drivers and other so-called subordinate staff. They account for 24% of all staff in the State Bank group, up from 22.5% in 1990. In nationalized banks, they are 21% of the total staff strength. Compare that to foreign banks, where they are just 3.6% of total employees.
But it’s RBI that has done the best job of cutting out the flab. In the five years between December 2000 and December 2005, the central bank managed to prune its employee strength from 31,275 to 22,192, a 29% reduction. However, central bankers seem to need a strong support staff of class IV employees, who make up as much as 33.9% of the bank’s total strength, up from 30.6% in 2000. Each class 1 employee of the central bank has 1.28 class IV staff at his disposal.