Despite all the shouting and screaming, the correction in the Sensex so far has been just 7.8%, measured by its closing value between 16th and 19 October. That’s hardly a big correction, going by the historical record.

Corrections are of different types, some of them short and sharp, while others go in for slow torture. During the slow torture sell-off in May last year, the Sensex fell by a huge 29.2% from its close on 10 May to the closing value on 14 June.

In contrast, during the crash in mid-May 2004, the Sensex lost 16.6% in just two trading sessions, although the depression that followed lasted for months.

Even the mini-correction in February/March this year saw the Sensex fall by 7.8% between 27 February and 16 March. The current sell-off, with sales by P-Note holders threatening to hang over the markets, is likely to be a long-drawn-out one, with a wave of selling greeting every rally. That a lot of pain is still to come is seen from the fact that the week ended 17 October saw $346 million flowing into India country funds, their best week in terms of inflows this year, according to EPFR Global, a research outfit tracking fund flows.

India was also a recipient of strong inflows into BRICs (Brazil, Russia, India, China) funds, GEM (Global Emerging Market) Equity funds and Asia ex-Japan funds, which together took in a net $3.3 billion in the week ended 17 October. Because inflows into India have been so strong, a sudden disappearance of a large chunk of them in the coming weeks will hurt even more.

The induced correction has made India one of the worst performing emerging markets this month.

The MSCI India index is up 1.88% this month, compared with 5.33% for the Emerging Markets Asian index, 12.72% for MSCI China and 12.29% for MSCI Indonesia. But that’s still better than the World Index, which is down 0.38% this month. The global trend of rotating funds out of the US and other developed markets to emerging markets is intact, but India, unfortunately, will not be a beneficiary if the proposed P-note regulations are not watered down substantially.

Two-wheeler stocks

Two-wheeler stocks have underperformed the market considerably this year, owing primarily to declining sales. Its effect on profit was all too visible in the June quarter results, when Bajaj Auto Ltd and Hero Honda Ltd reported a average 20% drop in operating profit. The performance in the September quarter was expected to be little different, but the reported results turned out to be quite a surprise.

Although sales volumes continued to be under pressure during the quarter, both Bajaj Auto and Hero Honda reported profit that was much higher than street expectations. Bajaj Auto’s adjusted operating profit was flat last quarter, despite a 13% drop in sales volumes. The primary reason for the improvement in performance was a sharp 11.2% year-over-year increase in average price realisations. (Bajaj’s reported revenues and profit for the Q2 quarter include an export incentive of Rs14 crore pertaining to the June quarter. The above analysis adjusts for this anomaly.)

Realizations rose for a number of reasons—the primary one being an rise in the proportion of premium bikes in total sales, and a marginal rise in the proportion of three-wheeler sales. Besides, it had raised prices in the export market to counter the rising rupee. Savings on excise duty thanks to the commencement of production at the company’s new facility also helped net realizations. Higher realizations helped curtail the impact of higher raw material costs, which had impacted margins in the June quarter. Further, the company’s decision to defocus on 100-cc segment led to a drop in selling and marketing costs, which is reflected in the 90 basis points saving on “other expenditure".

Hero Honda’s operating profit grew 2.8% on a y-o-y basis, and by 10.6% on a q-o-q basis. This was despite the fact that volumes were flat at last year’s levels. What helped was a better product mix, which resulted in a 4.8% increase in average price realisations. The company said that volumes in the premium segment have doubled in the January-September period, and its share in the 125-cc segment has also risen considerably. Hero Honda continued to grapple with higher raw material costs, but for which growth in profit would have been higher. But even the fact that profit has been maintained at last year’s levels has been a pleasant surprise. It’s no wonder both Bajaj Auto and Hero Honda have fallen by only about 1% since p-note scare hit the markets. Analysts say that if there are signs of volumes picking up during the festive season, demand for two-wheeler stocks could pick up considerably.

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