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Worst among equals

Mar 19, 2004

After touching an all time high of 6,250, the BSE-Sensex has retreated and has lost nearly 11% in the last one month, mainly on account of a deluge of IPOs that hit the markets and took away the liquidity from the markets. Also, with elections round the corner, the investors would rather wait and decide on their investment decisions only after a certain political party assumes office. Against this backdrop, let us see which of the five Sensex companies suffered the most during the past one-month and analyse the reasons behind the same.

 Feb 17,2004March 18,2004% Change
Sensex60365404-10.5%
Zee Telefilms155115-25.8%
HLL193144-25.4%
Tata Motors559450-19.5%
Dr Reddy1,239 1,000 -19.3%
Bajaj Auto992825-16.8%

Media and broadcasting major, Zee Telefilms, suffered the ignominy of heading the list as it has lost nearly 26% during the last one month. The decline seems to be the result of uncertainty over the CAS (Conditional Access System). While a policy paper on CAS is expected to be submitted by TRAI soon, it is believed that the implementation of CAS will take some time in coming, thus hurting companies like Zee, which were touted as the major beneficiaries of the same. Also, with Zee programs having a thin presence on the popularity charts, investors seem to be rotating their money into stocks, which are likely to give more assured returns.

Punished by the investing fraternity for its price cuts in detergents, an act in retaliation of the price cuts announced by rival P&G, the HLL stock suffered a significant 24% decline during the last one month and occupied second spot on the list. With detergents forming 21% of the company's topline in FY03 and the growth in the segment also showing signs of stagnating, investors turned towards FMCG stocks such as Marico and ITC, which do not have interest in detergents. However, we believe that the action was a rather hasty one as you cannot easily write-off a company, which is the undisputed market leader in most categories and has a logistical distribution that is unmatched by its rivals. Therefore, the current decline might be a good opportunity for those who want to be a part of the HLL growth story from a long-term perspective.

Auto majors, Tata Motors and Bajaj Auto occupy the third and fifth spots respectively on the list. Unlike their counterparts on the list, the decline in these stocks had more to do with their stretched valuations than anything else. Riding on the back of robust auto sales (especially CVs) and excellent 3QFY04 results, Tata Motors had appreciated considerably during the last year or so and the stock price seemed to have run ahead of its growth prospects from a 1-2 year perspective. As a result, on account of profit booking and better growth opportunities elsewhere in the sector, the stock tumbled nearly 18% on the bourses in the last one month. However, with Daewoo's CV division in the kitty and plans of raising US$ 500 m (Rs 22.5 bn) to fund its growth plans (which includes one new passenger car for the domestic market), the long-term growth prospects of the company look promising.

Pharma major, Dr Reddy's is fourth on the list, having lost nearly 12% over the last one-month period. The decline was largely the result of a patent battle loss with Pfizer Inc, over launching the generic version of the latter's anti-hypertension drug, Norvasc. The stock suffered as there was a lot of expectations built into the stock and it was hoped that the drug, which had sales of close to US$ 2 bn last year would give the profitability of the company, a shot in the arm. Most industry watchers reckon that the company's strategy of filing patent challenges rather than waiting for the patent to expire is of the risky kind and thus gives rise to a lot of uncertainties, as the current decline has shown. Therefore, if the company has to do well in the future it will have to adopt a safer policy of launching copies of drugs as well as focus more on the bulk drugs business.

The markets have remained volatile over the last few months and it has impacted various stocks in different ways. For the above mentioned stocks the effect has been negative. What we are trying to indicate here is that while sentiments play a role in determining the stock price of a company, the role is only secondary to the fundamentals of the company. In all the cases mentioned above fundamentals has been the determinant of the stock price. Investors need to make sure that their investment decisions are based more on fundamentals rather than what the market 'feels' about the stock.

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