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Worst performing blue chips in FY12

Apr 2, 2012

The financial year 2011-12 has finally come to an end. For most companies this is the time to balance their books and review profits generated over the last twelve months. But, what should investors do to take stock?

Well, the stock markets have not been on their best behavior over the past financial year. In fact for the first nine months of the year, the performance was abysmal. From 1st April 2011 till the end of December, the BSE-Sensex was down over 20%. However, since the start of 2012, the markets have seen an improvement. Since the beginning of January, the Sensex is up over 12%. A major reason for the same was that the Reserve Bank Of India (RBI) signaled monetary easing by ending its rate hikes and cutting the Cash Reserve Ratio (CRR). However, this could not compensate for the performance during the previous 9 months, and the Sensex ended the fiscal down over 10%.

In this article we will focus on the stocks that were the worst performers during the FY12. These stocks are the 5 worst performers from our universe of BSE-100 companies in FY12. Some of these stocks lost more than 50% of their value, while the others also lost significant ground. Let's now see which stocks you were better off staying away from.

Essar Oil (Returns in - FY12: -57%, FY11: -10%)

Even while stock markets have rallied over the past quarter, Oil and gas stocks have largely underperformed. Weak economic conditions have put the pressure on refinery margins. Plus India suffers from a unique situation, where even if crude oil prices are high, players do not benefit due to strict regulatory environment. Among the various large caps in the BSE-100 Index, leading private sector petroleum refiner Essar Oil has been the biggest loser on the bourses over the past fiscal. In the latter part of the fiscal, a weak refining market, forex losses, and alleged involvement of Essar Group in the 2G scam helped drag the stock price lower. The company received a blow when the Supreme Court asked it to refund over Rs 63 bn of sales tax credits along with accrued interest. The company has recently filed a review petition in the court in this regard, but the same severely dented profits for the 9 month period, and the company reported a Rs 37 bn loss. The high debt levels of the company have also spooked investors, with its gross long term debt to equity (9mFY12) standing at over 5 times. The company has US$ 262 m in Foreign Currency Convertible Bonds (FCCBs) which were issued to its promoter. The bond holders have now accepted changes that these bonds will compulsorily convert into equity. This will help reduce the debt/equity ratio going forward.

Adani Enterprises: (Returns in - FY12: -54%, FY11: 1%)

Corruption issues and the ban on illegal mining were the main reasons for the massive fall in Adani Enterprises stock price over the past fiscal. The stock was under pressure because of the alleged company's involvement in the Karnataka mining scam. The Lokayukta's report alleged that Adani Enterprises used to illegally export iron ore from ports in Karnataka as well as paid bribes to various officials. While Adani's extent to the involvement in the scam is not yet known, it is believed that nearly 23 m ton of iron ore was exported, while permits of only 12.6 m tonnes were issued. Shares Adani Enterprises were also affected after of Australia's parliament approved a new mining law. This aims to impose a 30% tax on iron-ore and coal mining profits. Adani Enterprises is one among the major Indian companies that own mines in Australia. For the first 9 months of the year, the consolidated total income was up 66%; however profits were down 4% due to higher costs. Interest charges also more than doubled over the period.

Housing Development & Infrastructure Ltd (HDIL): Returns in - FY12: -51%, FY11:-39%)

Until last year, concerns with respect to debt repayment and the possibility of rising interest rates took a toll on the real estate stocks. But the scenario for the sector continued to worsen as the constant rise in interest rates took a toll on companies with poor balance sheets. Demand was also impacted on account of the higher rates. Due to the slowing demand, companies had a significant amount of inventory built up on their books, which led them to resort to distress selling to free up capital. HDIL, being one of the largest players in the real estate sector was impacted significantly in the process. The latest negative news for the company was the hike in stamp duty in Maharashtra, where the company has high presence. HDIL's operating performance was very poor this year. During 9mFY12, the company's consolidated revenues increased by 5% YoY, while its net profits declined by 26% YoY.

Crompton Greaves: (Returns in - FY12: -49%, FY11: 5%)

Disappointing 1QFY12 results (which were a precursor to a series of upcoming poor performances) and few issues relating to management integrity saw the stock price of Crompton Greaves correct by approximately 49% during the last fiscal. Stiff competition and slower execution in the power systems segment eroded the margin profile of the company. Against an historical operating margin of 10-11% the company's margins have now tumbled into single digits. Further, management bought a corporate jet worth Rs 2.7 bn during the last fiscal in an environment where liquidity was hard to come by. This too was not well received by the market. Lastly, there were apprehensions in the market regarding the timing of stake sale by the management. It may be noted that the non-executive vice chairman of the company sold off his stake just prior to the earnings release (which was a big disappointment) raising doubts over insider trading. All these factors took a huge toll on the stock price of the company.

SAIL: (Returns in - FY12: -45%, FY11: -33%)

The stock price of Steel Authority of India (SAIL) has witnessed a severe beating over the last fiscal. This was on account of high coking coal prices, slowdown in construction activity due to the inflationary environment, delay in expansion plans and the looming uncertainty in the global economy. SAIL's operating margins have a negative correlation with coking coal prices as the company is dependent on imports to meet more than 90% of its coking coal requirement. Global coking coal prices increased sharply last year due to severe floods in Australia, which led to supply disruptions. Although coking coal prices softened towards the end of the year, the depreciation of the Rupee limited the benefits to the company. SAIL has been a laggard in terms of capacity expansion as compared to its peers. The company is in the process of expanding its saleable production capacity from current 12.9 m tons to 23.1 m tons at a cost of Rs 620 bn by FY15. However the expansion plans are facing delays and cost escalations. Moreover the company was planning to issue fresh equity and raise funds to meet the capex plans for expansion through the further public offer (FPO) route. However the FPO has been delayed and the company is forced to take on debt to finance the expansion, which will stretch the balance sheet.

In conclusion

As you can see from the above analysis, most of these stocks did not perform very well in FY11 either. But, they turned out to be complete duds in FY12. If you had major positions in either these stocks, it could have wiped out a big chunk of your portfolio. It doesn't make any sense for you to blindly expect the stocks in your possession to keep rising. You need to take a call based on the current economic scenario and sectoral developments. Plus, one should not have more than 4-5% exposure of ones portfolio to a single stock.

For FY13, we suggest that you focus on companies with good managements with strong economic fundamentals and minimum regulatory concerns. The Union Budget is also usually a good indicator to judge of which stocks may face pressure during the new fiscal. Also one should stay within ones circle of competence while investing. If you do, you may be able to avoid next year's biggest wealth destroyers.


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