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Markets: Performance over a year ...

May 10, 2006

The euphoria on the bourses refuses to die down, and the Indian stock markets continue to scale new peaks on the back of the consistent inflows of money into equities from both the fronts - institutional and retail. In this article, we have taken the top gainers from certain sectors over the past year and we explain why these sectors and stocks outperformed their peers. It must be noted that most of the stocks listed below are from the mid-cap space.

StockPrice as on
7th May 2005
Price as on
9th May 2006
% changeSector
Hindustan Zinc157 997 533.6%steel
Dalmia Cement79 370 366.0%Cement
Voltas259 1,070 312.6%Engineering
Force Motors300 927 209.5%Auto?
Madras Aluminium180 542 201.1%Aluminium
Kotak Bank129 375 191.2%Banking
TV 18271 701 159.1%Media
Godrej Consumer290 730 151.6%FMCG
Cipla110 275 150.1%Pharma
Essar Oil35 73 109.3%Energy

As can be seen from the table above, Hindustan Zinc has clearly outperformed the steel sector as well as the index by a wide margin. This is mainly because internationally, the demand for steel and zinc has increased multifold, and has resulted in zinc prices hitting multi-year highs. This is mainly due to the insatiable hunger of developing countries like China, whose construction activities continue to push prices northwards. Since prices are based on international prices, even the local players have benefited.

Similarly, cement stocks have also found increased favour in recent times, as demand continues to outpace supply. With no greenfield projects coming up at least in the near future, prices are expected to remain robust. It must be noted that cement being a bulk commodity, is a freight-intensive industry and transporting cement over long distances can prove to be uneconomical. This has resulted in cement being largely a regional play. While the southern region has excess capacity owing to the availability of limestone, the western and northern regions are the most lucrative markets on account of higher income levels.

The engineering sector has evolved as one of the highest wealth creators in the current bull run. This is mainly because of the UPA government's focus on improving the infrastructure of the country, resulting in engineering companies' order books overflowing. Also, the bargaining power of technology-driven companies like Voltas is high, as product differentiation is the key and executioners are limited. With infrastructure evolving as a key priority for our country, engineering stocks are slated to perform well going forward.

Auto, another sector whose demand has a direct correlation with GDP growth, has found immense favour in the past couple of years. Force Motors is an LCV player and since transportation activity has increased considerably, so has the demand for its products. However, it must be noted that a large part of the gains have been recorded ever since the company entered into a JV with MAN Commercial Vehicles Group, the largest truck manufacturer in the world, to manufacture heavy trucks in the country.

The FMCG sector has seen revival of sorts, as the sector that had lost its glory on the bourses is back in action. After underperforming due to low or negative growth from FY01 to FY04, FMCG companies have reported good numbers in the past year. Godrej Consumers has enviable return ratios and is a well-known company in the mid-cap space. With a presence mainly in soaps and hair colours, the company has performed better than its peers. Hair colour, where it commands a 40% market share, is the fastest-growing category in the FMCG segment. Also, in soaps, the company has slowly and steadily been able to increase its market share mainly due to its flagship products like Godrej No. 1 and Cinthol.

The energy sector has been in the doldrums ever since oil prices have headed north. Oil stocks have clearly underperformed the indices, as retail petrol and diesel prices continue to lag international prices. Oil marketing companies like IOC, BPCL and HPCL continue to bleed due to their share of subsidy burden and are slated to turn sick if the scenario does not improve.

Conclusion
While investors have behaved irrationally at more times than one, those who have set their faith in fortunes of quality companies have seen their investments multiply, and would continue to do so in future as well. Quality always comes at a price, be it the stock markets or any other one, and nothing can be better than that for investors and markets for long-term wealth creation. To end with a quotable quote, "It is always better to buy a good stock at a bad price, rather than a bad stock at a good price."


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