After Friday’s stomach-churning roller-coaster ride, the Sensex ended the day at 14,141.52 points, which is 10.4% below the level at which it closed on 26 July, just before the sell-off started.

How deep is this correction, compared to previous ones?

So far, it hasn’t been deep at all. If the market can come roaring back after a freeze-up in credit and after a situation so serious that central banks have been forced to pump in billions into the money market, it’ll be a big surprise. That’s because the fall in the Sensex so far has been just a teeny bit more than the common or garden correction we had in February and March this year. At that time, the Sensex fell from 13,649 on 26 February to 12,415 on 5 March (closing values), a drop of 9%. That was a short and sweet correction, with the market going on swiftly to make new highs.

The May 2006 sell-off was much worse, with the Sensex falling from 12,612.38 on 10 May to 8,929.44 on 14 June, a fall of 29.2%. We’re still a long way off from that sort of correction this time. And during the May 2004 fall, in the aftermath of the UPA government coming to power, the Sensex fell 16.6% between 13 May and 17 May. The fall was very sharp and it took a long time for the market to recover.

The current sell-off is different from all these other instances. In 2004 and 2006, the markets fell on fears that interest rates will be raised in the mature markets, affecting liquidity. This time, the credit markets are no longer functioning and the level of uncertainty is far worse, because nobody knows for sure how much of the toxic paper is being held and in whose books. The upshot has been that banks are afraid to lend and they have started to call in loans. This is far more potent stuff, not the usual 10% correction kind.

What about the 2000 meltdown? At that time, the Sensex fell 30% between its 24 February level of 5,810 and 19 May and meandered up and down in a range thereafter, reaching 3,198 in September 2001 before going down to 2,680 in the wake of the 9/11 attacks.

The unmentionable question being asked today is: will it be as bad as 2000?


Ever since the markets started correcting in late July, Hindalco Ltd’s shares have fallen by 25%, more than double the rate at which the NSE’s Nifty has fallen. Incidentally, Tata Steel Ltd shares have fallen at pretty much the same rate as Hindalco. While falling metal prices are a common cause for the decline in both companies’ fortunes, so is their large exposure to the debt market. Both companies have raised lots of debt to fund their mega acquisitions, and the crisis in the subprime segment is sure to affect the cost of funding for low-grade bonds such as those issued by these firms through their subsidiaries.

Hindalco’s $6 billion (Rs24,960 crore) acquisition, Novelis Inc., is expected to add to the company’s bottomline only from fiscal year 2010-11, Hindalco told analysts in a recent meet. Falling metal prices and the possibility of higher funding costs mean that the pain in the interim would be worse than expected. Novelis’ recently announced results for the quarter ended June 2007 showed no signs of a sooner-than-expected return to profit. Although revenues increased 10.3% to $2.8 billion, profit before interest, tax and exceptional charges related to the acquisition fell by 15% to $33 million. Novelis’ management claims that last year’s earnings included an abnormal gain from changes in metal prices, which takes away from the core operational performance. Adjusted for such gains and losses on derivatives contracts, profit stood at $42 million last quarter, compared to a loss of $1 million in the year-ago June quarter. The improvement was due to a better product mix, price increases and a lower exposure to beverage can contracts with price ceilings. Such contracts now account for 10% of total shipments from the firm.

Even if one goes with this argument (that is, gains/losses from changes in metal prices and from hedging positions are extraneous to the company’s operating performance), it is important to note that the company’s interest burden of $51 million completely wipes out its profit of $42 million.

Worse still, cash flow from operations stood at a -$274 million, due to ceiling contract losses of $80 million and a sharp increase in working capital.

Based on the June quarter financials, Novelis accounts for over 70% of the combined entity’s revenues, which means much of Hindalco’s fortunes would depend on how its acquired company fares.

The fact that it continues to run on losses explains why Hindalco shares have underperformed the market by 18% since the acquisition.

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