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Is 50% hike in this stock in 3 months justified? - Views on News from Equitymaster
 
 
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  • Mar 30, 2012

    Is 50% hike in this stock in 3 months justified?

    The pre-budget quarter is crucial for the Indian economy, and always full of anxiety for companies and investors.

    The Retail industry in particular anticipated some key decisions in its "wish list". These included the opening up of foreign direct investment (FDI) in multi brand retail, direct tax code, and implementation of the goods and services tax (GST). We now know that the 2012 Budget, announced on March 16, 2012 brought no clarity to these wishes, which basically remained unsatisfied.

    So, how did retail stocks fare during this uncertain past quarter ending March 31, 2012.

    For our analysis, we considered India's three largest retailers. These three companies have similar business models. We left speciality retailers out of our scrutiny, since their business models are quite different from the three big retailers.

    Trent (Westside) rose by 10% point to point over the last quarter, in line with the Indian stock market Sensex (50 largest companies) growth during the same period. Pantaloon Retail too displayed more or less similar positive performance, and marched northwards by 12%. But, the stellar performance came from Shoppers Stop, which was up by a whopping 50% in the last 3 months.

    What could be the reasons for such an outstanding performance from Shoppers Stop, the Raheja Group company?

    For starters, the most important Shoppers Stop budget "wish" item was nationwide implementation of GST. Shoppers Stop's management felt that GST would simplify the tax structure, and so help cut costs and generate more revenues. While the budget did not assert an immediate rollout of GST, it did affirm that August 2012 would be the implementation date. This brought in cheers to Shoppers Stop, and whose stock price went up by 8% and 10% on the Budget announcement day, and the day after. Of course, Trent and Pantaloons would also benefit from the GST implementation, but their stock prices barely moved. (Trent was up by 2% on the budget day and down by 2% on the next day while Pantaloon was down by 3% on the budget day and traded flat on the next day).

    Another important bit of news that came from the Shoppers Stop was regarding Hypercity, its food and grocery retail chain. Hypercity, a loss making unit, which had been launched in 2006, was continuously being restructured. These efforts included changes in product mix, reducing store sizes, and other cost control measures. Now, the company declared that Hypercity would turn-around and become profitable in a couple of years.

    Although these developments are heartening for Shoppers Stop, we do not believe that they warranted such an exponential rise of 50% in its stock price within a three month period. The stock made this huge leap despite there being no major changes in the company fundamentals. We feel that this kind of price movement is essentially speculative in nature. And so, investors would do well to stay away from such stocks. In this particular case, investors should wait for a couple of years to see if Hypercity and other company pronouncements actually materialised.

    It is in the interest of the investors to stay calm and not get too excited, or read too much into management predictions or general announcements. Specially, they should not over-react to forecasts that are two years out in the future and which are unsubstantiated by facts.

    To invest on such scanty information, is to pull the trigger impulsively. It is like rolling the dice and hoping for the best. It is speculation at best and not investment as per us.

     

     

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