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Stock markets: The under-performers

Feb 18, 2004

Last week, we had carried an article which talked about the top 5 sectors that gained (in terms of market capitalisation) in the year 2003. We looked at some of the key drivers for their growth and a brief comment regarding their future outlook. In continuation of the same, this time we look at those sectors, which failed to beat index returns (76%) and what was the cause of their under performance.

Bottom 5 gainers in 2003
Industry% gains
Cement68%
Media54%
Telecom47%
FMCG and Food & Beverages26%
Software17%
Note: Data restricted to NSE-50 stocks

The above table lists down the bottom 5 gainers in terms of market capitalization in 2003. Let us look at some of the dampeners for the sectors above:

Cement:
Cement companies faced rough waters for most part of 2003. With the Indian economy struggling to come out of rough weather in early 2003, the truckers' strike in April 2003 only worsened the situation by affecting the movement of cement. This was followed by monsoons and during this period, construction and infrastructure related activities tend to take a backseat. However, the discomfort for the sector primarily arose from the prolonging generosity of the rain Gods, which continued to put pressure on cement demand offtake and consequently cement prices remained subdued. Just to put things in perspective, the growth of the cement industry, which averaged 8%-9% CAGR during the last decade, grew a mere 4.5% in the period April-December 2003. Lower cement offtake had also turned the demand-supply scenario unfavourable for the industry. However, off late, cement prices have started showing signs of strength on the back of strong pent up demand. With the government committed at improving infrastructure and the housing boom being witnessed in the country, better times may be ahead for the industry.

Media:
The fortunes of the media industry remained plagued by the uncertainties with respect to the implementation of the Conditional Access System (CAS) last year. Persistent opposition by certain factions of the media industry coupled with the government's reservations at implementing the system in view of the impending 2004 elections and some other regulatory uncertainties, had forced the postponement of the implementation of CAS. Even after the system was introduced in a couple of metros in the country, it failed to progress smoothly due to varied reasons including shortage of set-top boxes. Since there was apprehensions regarding the consumer capability at subscribing to paid channels and the fact that the Indian economy was recovering from a slowdown, ad spends had taken a hit, which had affected the revenues of many media companies. However, going forward, while there continues to be lack of clarity over the smooth functioning of the system when introduced on a larger scale, the appointment of a regulator (TRAI) as a moderator could spell good times for the industry. Moreover, with the economy on the upturn, ad revenues of media companies would see better times ahead.

Telecom:
While this industry has shown tremendous growth in 2003 in terms of subscriber base, this growth has been restricted largely to the cellular industry. The absence of any representation on the index of a big cellular player (like Bharti Tele) is the cause of the sector under performing in 2003. In 2003, MTNL and VSNL represented the telecom sector on the NSE-50. The massive growth in the 'cellular' industry was in itself the biggest reason for these stocks to get off the radar screens of big-ticket investors. Further, while MTNL could not withstand the competition from private players, both in the fixed line as well as the cellular segments, VSNL's fortunes were marred owing to falling international long distance (ILD) tariffs. Going forward, we feel that consolidation would be the theme for the Indian telecom industry, which would ultimately result in the emergence of 3-4 integrated telecom players.

FMCG and Food & Beverages:
One big reason for the sector being out of favour was the economic slowdown being witnessed in the country. This was primarily the impact of the monsoons failing in 2002, which had affected the spending power of the 70% Indian population dependant on agriculture. Further, the performance of the sector was marred by the fact that the pricing pressure continued in wake of the intense cutthroat competition in the industry. Lack of pricing power and lower demand put significant pressure on the topline of majority of the players in the sector. However, going forward, with the lag effect of normal monsoons in 2003 yet to play out completely on the economy coupled with the fact that the economy is already on a roll and the continuous efforts by FMCG companies at improving cost efficiencies, would assure of a good performance by the sector in the medium-term.

Software:
This sector 'takes the honours' for being the biggest non-performing sector (from those in the NSE-50) of 2003. Since the Indian software sector has a huge exposure to the international markets (largely the US), the sector prospects were clouded at the start of 2003 due to various geo-political uncertainties created by the Iraq war, which was followed by the spread of SARS in many Asian countries. The after-effects of the terrorist attacks on the US in 2001 continued well into 2002, which had led to the slowdown of the US economy considerably. Infact, at one point of time, there were serious concerns about the US economy going into a recession. This had affected US tech spending budgets, which in turn had affected Indian software companies in terms of slower volume growth and billing pressure. However, going forward, with the US economy seemingly back on the growth track (as per certain US economy indicators), there is every possibility of the US tech spending reviving, which would be reflected in higher volumes for Indian software companies and stabilising pricing.

However, akin to the previous article, we would like to re-iterate that investors should have a cautious approach towards companies and should make prudent investment decisions depending on the companies' management and valuations. Although, the potential for growth in the long term is immense, at present, the valuations of many companies seem to be stretched. From here on, growth will be the key driver for any further rise in stock prices and to that extent, the emphasis on risk has to be higher than earnings prospects.

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