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Are you invested in any of these stocks? - Views on News from Equitymaster
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  • Feb 27, 2009

    Are you invested in any of these stocks?

    If yes, you would not like to read further. Or probably you would! Well, in the previous article, we had taken a look at stocks that have performed robustly over the last decade. In this article, we shall look at those stocks that have been the top underperformers during the same time frame.

    Underperformers over a period of ten years

    Tata Motors: First on the list is the stock of Tata Motors, which is the only stock to have dropped in value as compared to its price a decade ago. As compared to the Sensex's gain of 171%, the stock of Tata Motors is down by nearly 17% over the last decade.

    Source: CMIE Prowess
    If we look at the adjacent chart, we can notice that the stock has performed very well over a period of ten years. However, the last two years have been difficult for the company. It has gone through a variety of rough patches, foremost being the not so good timed acquisition of Jaguar Land Rover. It may be noted that the company made this acquisition at a time when it was incurring a huge capex (for capacity expansion) as well. In addition to this, Tata Motors ran into land acquisition issues with the West Bengal government, which led to the shifting of the 'Nano' plant. This not only led to a delay in the launch of the car but also cost overruns.

    The current slowdown in CV demand made matters worse for the company as it led to serious cash flow problems. With the demand for vehicles dropping rapidly, especially the commercial vehicle segment (nearly 70% of Tata Motor's revenues), concerns regarding the company's outlook are reflected in its share price movement in the last year.

    Source: CMIE Prowess
    Hindalco Industries: Second in line is Hindalco Industries, the flagship company of the Aditya Birla Group and the industry leader in the aluminium and copper segments. It provided a point to point return of 3% during the period under consideration. This can be very well explained by the fact that the company operates in a commodity business which is cyclical in nature. Moreover the company underwent a change in its business model in 2003 by incorporating the copper business which has lower margins. Furthermore, in 2007 it acquired Novelis to catapult itself into the league of world's top 5 aluminium producers, as an integrated producer with low cost alumina and aluminium facilities combined with high-end rolling capabilities and a global footprint in 12 countries outside India. However, this led the company to dilute its equity and even raise substantial amount of debt to fund the acquisition.

    Source: CMIE Prowess
    Hindustan Unilever: While Hindustan Unilever (HUL) has been the best performing stock in 2008, its performance for a decade has not been as good. HUL has underperformed the market over the last ten years with the stock gaining by only 35%.

    The company has reported a muted compounded annual growth rate of 5% in topline and 8% in profits in the last decade. While the financial performance in the recent years has been robust, HUL witnessed a decline in sales between CY01 to CY04. This was mainly on account of the economic slowdown, which led to low consumption levels, thereby restricting growth. Also the company's operating margins declined from 19.6% in CY02 to 13% in CY08. The reason behind the same has been on account of increasing competition, which further led to higher spending on advertisements. Over the years, HUL has been losing its market share in several key categories, which is an indication of the competition in the marketplace.

    Source: CMIE Prowess
    Ranbaxy Laboratories: With its stock increasing by only 44%, Ranbaxy has been among the worst performers on the index over the last decade. The reasons for the same are manifold. The company did well during the early part of the decade as it generated substantial revenues and profits from the US generics market and considerably improved its standing in the domestic market. By then, it had already started establishing a global footprint and became aggressive in challenging patents of global pharmaceutical majors. It also managed to cross the US$ 1 bn revenue mark in 2004.

    But the major turning point came in 2005 as severe pricing pressure in the US generics market eroded its profits considerably. Since then growing its revenues at a brisk pace has not proven to be easy which has compelled the company to focus more on the emerging markets which generate higher profits. Not only that, the promoters' stake sale to Daiichi Sankyo and the troubles with the US FDA have obviously not gone down well with the investing community. While the company's revenues grew at a CAGR of 16% in the last 8 years, performance at the net profit level has been very volatile. This probably explains why this stock has not done well on the bourses.

    Source: CMIE Prowess
    Tata Steel: Last in the list is India's largest steel company, Tata Steel recording a point to point return of 95%. This translates into a compounded annual growth 7% over the last decade. The company made a major acquisition of Corus in FY07 by leveraging its balance sheet during the bull run of the steel sector. However, little did the company know that after a couple of years, the world will face one of its worst economic crisis. This changed the outlook for Corus as the demand for steel in Europe has slumped creating serious cash flow problems for the company. Moreover, the demand in the domestic market also slowed down thus raising concerns over the company's ability to pay back the debt. This led the stock price of the company to witness a major fall.



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