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Markets 2002: Reflections...

Jan 4, 2003

The year 2002 saw both the BSE Sensex and the NSE Nifty gain a little over 3% YoY. The performance doesn't seem too enthusing, but it was hardly surprising considering a sluggish economy, below expectation monsoons and 3% GDP forecast by the CMIE. But the Indian indices did perform better than the leading global indices, for whom 2002 was largely disappointing.

Bucking the trend...
 Index as on
Dec 31,2001
Index as on
Dec 31,2002
BSE-SENSEX 3,2623,3773.5%
S&P CNX NFTY 1,0591,0943.3%
Dow 10,0228,342-16.8%
Hang Seng11,3979,321-18.2%
Shanghai Composite1,6461,358-17.5%

We analysed the components of NSE Nifty to get a bearing of what happened in India Inc. during 2002. Out of the 50 stocks that make up the Nifty, 18 finished in the red during 2002. The top 25 gainers list included 3 banks, 3 auto, 3 software, 3 cement, 2 pharma, 2 engineering, 1 hotel and 1 steel company. The divestment probables, i.e. PSUs too were the key movers (3 in all).

PSUs: Some of the biggest gainers in 2002 belonged to the divestment group. Shipping Corporation emerged as the No.1 gainer (up 116%) during the year. HPCL followed closely with a gain of 108%. The news of BPCL not making it to the divestment slot saw the stock price recede, but it still managed to finish 2002 with 14% gains. One can deduce that PSUs were hot in 2002 and going by the mood of investors, it is likely to see a premium position in 2003 too.

Software: The year also saw the return of software during the second half. Digital, Satyam and Infosys represented the sector in the Nifty, but their gains were not even close to yesteryear’s multi-bagger performance. Satyam topped the 3, with 18% gains. While 2001 saw Wipro bag a huge US$ 70 m contract from the telecom subsidiary, Lattice Group, UK – the biggest outsourcing deal ever for an Indian company, 2002 followed it up with Wipro and TCS bagging US$ 50 m – US$ 70 m per year deal with Lehman Brothers. In another landmark development, Satyam tied up with Computer Services Corporation, (CSC). This was perhaps for the first time that an Indian IT services company tied up with a competitor in the west. The move was significant in the sense that CSC would be able offer its services at a very competitive rate by outsourcing the work to Satyam. Satyam on the other hand, will be able to leverage on CSC’s brand and strong presence in the markets like US and Europe. Though the contract started on a smaller scale, it opened a door of possibilities for others in the sector.

Banks: 2002 was also a landmark year for the Indian banking sector. The year saw passing of the NPA ordinance bill, speeding up of restructuring and technology orientation in the sector. Retail was the ‘mantra’ for the industry and consumers saw finance available at never before rates. Housing and vehicle demand was healthy in a year of slipping IIP growth thanks largely to affordable finance. ICICI Bank, SBI and Oriental Bank were among the top gainers. ICICI Bank saw its first year of merged operations (with ICICI) and SBI’s restructuring and retail success caught the investor’s fancy. In 2003, investors will be keenly watching the NPA recovery moves as well as the M&A activities in the sector. The year seems ripe for a host of partnerships and strategic stake sales in the sector.

Auto: The year saw the comeback of Telco as commercial vehicle demand picked up and its passenger car division recorded profits for the first time in the September quarter. Restructuring moves by M&M through stake sales in non-core businesses and the launch of the SUV ‘Scorpio’ saw this company too, emerge as a key gainer. Though Hero Honda displaced Bajaj Auto from the Numero Uno slot in the two wheeler segment, the latter’s impressive portfolio restructuring in favour of motorcycles saw the company’s fortunes rise as it grew faster in this segment than Hero Honda itself. Bajaj saw its motorcycle volumes rise by over 50% YoY in the period April-September 2002. And the trend continues.

Nifty Top 10 gainers
Dec 31,2001 (Rs)
Jan 1, 2003 (Rs)
BSE-SENSEX 3,2623,3944.0%3,758 / 2,828
S&P CNX NFTY 1,0591,0963.5%1,206 / 920
SHIP. CORP. 3065115.9%112 / 29
HPCL 139289108.1%345 / 134
TATA STEEL 8715173.7%152 / 85
TELCO 10016262.1%173 / 97
ICICI BANK 8914159.2%164 / 85
SBI 18228356.1%319 / 176
IPCL 528052.0%158 / 51
ORIENTAL BK. 335049.1%53 / 32
TATA CHEM 405847.0%70 / 39
RANBAXY 43259738.4%611 / 421
More Gainers...

Cement: Out of the top 4 cement companies, 3 figured in the top 25 list. ACC, L&T and Grasim gained in a year that saw despatches show healthy growth at 10-15% for these companies. The consolidation in the sector, with ACC-Guj Ambuja and L&T-Grasim combine seemed imminent. The year also saw Grasim ruffle Sebi feathers over its open offer for hiking stake in L&T. The L&T management too, was up in arms against the move. This issue is likely to continue figuring in headlines during 2003.

Pharma: 2002 was a year, which saw both success and failure in equal measure for domestic pharma companies. While Ranbaxy basked under the glory of milestone payments from Bayer over Cipro XR 500, Dr. Reddy’s received a major setback with suspension of clinical trials for the outlicenced anti-diabetic molecule, Ragaglitazar. However, both the companies ended 2002 with hope and optimism. The US courts ruled in favour of Dr. Reddy’s in the Amlodiphine Malate patent. Consequently, the company will be able to launch the product by August 2003, when Pfizer's exclusivity term on the product expires. Similarly, Ranbaxy received US FDA approval to commercialise Isotretinoin capsules, an equivalent of ‘Accutane’ that has a market of US$ 23 m in the US. So while Ranbaxy occupied its spot among gainers, Cipla and Dr. Reddy’s finished in the red during 2002. The new year is full of promises for the Indian pharma companies, with a host of generic filings and product pipelines to be put to test.

And finally, though index heavyweight Reliance ended the year in red, the group’s interest in IPCL and BSES saw both these companies finish among the top. During the year, Reliance made an open offer for management control of BSES and saw through an impressive restructuring at IPCL.

The losers...

FMCG: The year was disappointing for FMCG companies as poor monsoon overhang and economic sluggishness continued. The year saw tough times for oral care and malted beverage companies. Though soaps and detergents recorded decent demand, topline sales of FMCG major, HLL, witnessed an unprecedented decline for the first time in many years. For the first nine months of 2002, HLL reported an over 8% topline dip. Consequently, the stock lost over 18% market cap during the year. With rural economy showing little signs of picking up, the index heavyweight is looking at another tough year ahead. But the company that was the worst hit in the sector was GSK Consumer (formerly SmithKline Beecham Consumer Healthcare). The stock lost 34% of its value as the malted beverage market shrunk. The company being the market leader (65% share with Horlicks and Boost) was the worst hit, reporting 7% dip in topline growth in the first nine months of 2002.

In all, 6 FMCG companies lost value among the Nifty losers. The others were Dabur, Colgate, Britannia and ITC. Colgate’s inability to expand the oral care market, ITC’s diversifications and Britannia’s dairy business demerger were the key factors for this poor show. The year also saw Cadbury bidding adieu to the Indian investor as it opted to delist from the bourses. Reckitt Benckiser may be the next in line in 2003.

Telecom: Though the telecom sector was a boon to the consumers in 2002, it proved to be a deathblow for traditional monopolies like MTNL and VSNL. With ISD charges seeing over 40% fall, and its market share being eaten up rapidly by competition led by Bharti, VSNL saw its profits pruned by over 30% in the September quarter. MTNL’s performance was similar. If Bharti proved to be the nemesis of MTNL and VSNL in 2002, Reliance Telecomm may give Bharti a run for its money in 2003. The company is rolling out WiLL (limited mobility) during this year and its competitive rates have already forced all cellular operators to announce a significant cut in mobile STD tariffs. And this is just the beginning. Tata Power too, suffered in 2002 owing to investors concern over its significant exposure to group telecom companies, Tata Teleservices and VSNL.

Nifty Top 10 losers
Dec 31,2001 (Rs)
Jan 1, 2003 (Rs)
BSE-SENSEX 3,2623,3944.0%3,758 / 2,828
S&P CNX NFTY 1,0591,0973.5%1,206 / 920
VSNL 20699-52.30%235 / 88
DABUR 6844-35.50%70 / 43
SB CONS. 396262-33.90%411 / 248
HCL TECHNOLOGIES 276188-31.80%330 / 153
MTNL 12695-24.40%178 / 90
CIPLA 1,134898-20.80%1,209 / 806
COLGATE 167135-19.20%171 / 123
HLL 223182-18.40%266 / 152
NIIT 227187-17.40%347 / 107
BRITANNIA 610511-16.20%630 / 481
More Losers...

Among the other key losers was Gujarat Ambuja, which lost 14% market cap owing to concerns over triggering of an open offer to ACC shareholders at a significant premium, owing to Sebi’s investigation.

With the government likely to miss its fiscal deficit target once again and expectations of a populist budget this year, thinks do not look too strong on the reform agenda. Also, concerns over US – Iraq tussle continue to drive crude prices higher, which is likely to water down to the Indian economy going forward. Demand prospects for the FMCG sector look challenging owing to the sluggish agricultural output. While everyone is expectant of a revival in 2003, investor opinion is divided sharply as to which sector will lead the turnaround, if at all. In a recent poll on Equitymaster, we asked users ‘Which sector will outperform in 2003?’ giving them a choice between TMT, PSUs and pharma. 31% of respondents favoured TMT, 40% favoured PSUs and 29% voted for pharma sector.

2003 in a sense is a ‘Year of Reckoning’, both in terms of measuring the government’s seriousness on reforms and in terms of expectations of an economic revival. By the look of it, divestment, Reliance’s performance in the telecom sector, growth in HLL’s topline, consolidation in cement and banking sector and order flow for the tech companies will be the key pointers for the index movements this year.

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