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Look closer at performance

Mar 11, 2004

The indices have behaved in a very volatile fashion in 2004 with 150-200 points intra-day movements not an uncommon phenomenon. However, the bottomline is that they have failed to head anywhere in the 45 trading sessions of this year so far, which is evident from the fact that the BSE-Sensex has gained a mere 1.4% in 2004 to date. Contrary to this, if we look at the sectoral performance of various indices, the picture is somewhat different. Here we look at some of the sectoral index performances on the BSE and the reasons behind the same. We have considered five indices here i.e. BSE Bankex, BSE FMCG, BSE IT, BSE Healthcare and BSE PSU.

Index% gain in 2004
BSE Bankex4.5%
BSE Sensex1.4%
BSE Healthcare-5.0%
BSE FMCG-12.0%
BSE Infotech-14.3%
* As on March 10, 2004

Of the above five sectoral indices, while the BSE Bankex (up 5%) and the BSE PSU Index (up 4%) managed to outperform the benchmark index (up 1%), the other three were the laggards, all giving negative returns during the period under consideration (see table above).

The news that favoured the gains in banking stocks in 2004 was the proposal by the government to raise the FDI limit in the banking sector, which ultimately materialised last week with the final nod to raising the FDI limit in banking companies to 74%. This is likely to be a huge positive for the sector in terms of consolidation. However, the caveat here is that while the FDI limits have been raised, the voting rights have been capped at 10% for foreign investors. This means that despite the raising of FDI limits, consolidation may not materialize on a larger scale unless the issue of voting rights is amended. Nevertheless, banking stocks, especially the smaller players in the industry, have been witnessing buying interest on the bourses.

The other key index gaining ground in 2004 is the BSE PSU index, which has gained 4% so far. While PSU stocks remained largely out of favour for most part of the new calendar year, it was only in the last few trading sessions that brought the category back into the reckoning. It must be noted that PSU stocks, especially those who's IPOs were lined up in the month of February and March, had lost considerable ground since the start of the year. With no apparent reason for the weakness in these stocks, one is forced to believe that the divestment minister's indication of a bear cartel responsible for driving the prices down could be the possible reason for the same. This is because, soon after the warning by the minister, the slide in the stocks was controlled. Further, with the successful completion of the offerings, including that of ONGC, the largest amongst all, it seems to have brought faith back into the investors with respect to the government's divestment drive. Also, with the divestment minister indicating the continuance of the divestment programme if it comes back to power, has led to frenzied buying amongst PSU divestment candidates.

Coming to the losers now, the BSE Healthcare index has lost about 5% year-to-date. Apart from the fact that the sector has not witnessed much buying interest right from the beginning of the year, one stock spoiled the picture further for the index. Dr. Reddy's, which has the second highest weightage on the BSE Healthcare Index. It has dragged the healthcare index lower in the recent past. With the Amlodipine Maleate ruling going against the domestic pharma major, the stock received significant drubbing. The reason for the tepid performance of the sector in 2004 can also be attributed to the already rich valuations of the stocks in the sector, which seemed to have factored in some of the optimism related to the post-patent regime from 2005 onwards.

Similar to the pharma sector, the FMCG Index has also given negative returns of 12% in 2004 so far, a large part of which could be attributed to the sell-off witnessed in the HLL stock post the price war that was started by P&G, which slashed the prices of its detergents by 30%-50% forcing the FMCG major to follow. With the highest weightage assigned to this FMCG major in the BSE FMCG Index, any movement in the stock is most likely to have a corresponding movement in the relevant index. Apart from this, the FMCG sector as a whole has been reeling under pressure in recent times owing to reasons like cutthroat competition in the industry (more so from regional players) and the yet to pick up demand from the rural sector owing to the lag effect of good monsoons, which could be seen in the months to come.

Last, but not the least, is the BSE InfoTech sector, which has lost over 14% to date. The only apparent reason for this weak sectoral performance is the increasing opposition to US outsourcing work to countries like India. It must be noted that the industry majors, Infosys (down 12% year to date), Wipro (down 16%), Satyam (down 20%) and HCL Tech (down 10%), constitute over 2/3rd of the total weightage of the BSE InfoTech Index. It must be noted that these companies have been ramping up their employee base since the last few quarters in anticipation of larger volumes. However, the threat from the US outsourcing backlash has also been ever increasing with about 50 Bills already being presented in the US against this trend, clouding the possibilities of higher volumes, at least in the near future, which has led to a re-alignment of the sector valuations.

What we can conclude from the performance of sector specific indices is that from here on, investors should leave behind the expectations that all sectors would rally like that seen in 2003. What we are trying to say here is that from here on investors would have to keenly follow the performance of companies and sectors in order to ascertain the value of the stocks. The 'poor valuations' story may well be over. Growth should be the main consideration from here on as far as assessing the valuations of stocks is concerned.

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