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Market Capitalization: Shifting preferences

Jun 2, 2003

The first half of 2003 so far has been quite eventful for the equity markets. Sectors, which ruled the bourses for a period of time, have suddenly lost favour. Investors have started looking out for new sectors, which may provide better opportunities. To give credence to this belief we undertook an exercise citing the BSE 100 as our base to evaluate the shift in investor interest (measured by changes in market capitalization) during the last few months.

The Laggards
Sector No. of companies Jan 1st 2003 May 22nd 2003 Change
Software 12 899,384 495,983 -44.9%
Packaging 1 6,093 4,648 -23.7%
Media 2 44,168 33,855 -23.3%
Consumer Durables 3 8,093 7,282 -10.0%
FMCG 10 706,694 646,090 -8.6%
Hotels 2 18,216 17,019 -6.6%
Pharmceuticals 12 348,054 333,344 -4.2%
Automobiles 8 203,826 196,708 -3.5%
Investment & Finance 3 108,256 107,387 -0.8%

Let us start with the ones who lost the most during this period. From January 2003 software sector has been the largest loser. The sector has lost around 45% of its market capitalisation and the stocks, which lost the most, have been Wipro (50%) and Infosys Technologies (44%). Interest in the sector diminished mainly post the March quarter results of these companies, as these stalwarts gave a weak outlook for FY04 owing to the pressure on margins. The global slowdown in IT spending also seems to be weighing heavily on the minds of investors. Thus it is likely to take a while backed by a strong trigger to restore investor interest in this sector.

Apart from the software sector, the media sector (down 23%) also lost favour during this period. The delay and uncertainties over the implementation of condition assess system (CAS) has created a dent in the investor sentiment towards media stocks. But this may not paint the true picture, as there are only 2 stocks in the BSE-100 from the sector, namely Zee and Pentamedia Graphics. Zee being the largest listed broadcasting company in India lost over 65% of its market capitalization during the last five months. Now since the date for implementation for CAS (July 15) has been released, investors would look closely at the developments (implications for media companies) post the implementation for making up their minds regarding this sector.

Poor monsoons in FY03 and further uncertainty regarding monsoons in FY04 have affected sentiment towards sectors like FMCG and auto. Both these sectors are largely driven by demand, which is dependent on the monsoons. Although, the IMD has announced that near normal monsoons are expected during 2003, investors still seem to be cautious. Auto and FMCG companies are already reeling under the demand slowdown caused by poor monsoons in FY03 and hence the apprehension among the investor community. The ones that lost their market capitalization in the auto sector were Hero Honda (15%), Bajaj Auto (7%), TVS Motors (4%) and Punjab Tractors (6%). Among FMCG stocks HLL (19%), GSK Consumer (8%) and Dabur (7%) were the major losers.

Gainers table
Sector No. of companies Jan 1st 2003 May 22nd 2003 Change
Auto Ancillaries 2 21,727 34,605 59.3%
Engineering 6 123,116 172,198 39.9%
Chemicals & Fertilizers 5 31,147 39,388 26.5%
Textiles 1 6,261 7,525 20.2%
Aluminium 2 104,587 120,375 15.1%
Shipping 2 24,837 28,523 14.8%
Banks 6 353,910 405,062 14.5%
Paints 1 20,828 23,187 11.3%
Power 2 52,659 57,525 9.2%
Telecom 5 139,786 152,085 8.8%
Diversified 2 81,194 86,767 6.9%
Petroleum 7 878,011 912,228 3.9%
Cement 4 56,182 58,096 3.4%
Steel 2 97,549 97,801 0.3%

While the losers have lost significant ground in the period mentioned, the gainers have also registered sharp gains in the same period. Market capitalisation of engineering stocks has gone up by around 40%. This is largely due to the engineering companies posting healthy FY03 results particularly in the March quarter. During the quarter, companies like BHEL, ABB, Siemens and Neyveli Lignite had strong order books, indicating that the prospects of this sector are looking good. The government’s continuing efforts for infrastructure development in the form of highway projects and the passing of the Electricity Bill have improved the prospects of increased investments in this sector.

The banking sector has created a mini bull run during the last couple of months. However, the noticeable thing about the upward movement of the banking stocks is that it has been largely restricted to PSU stocks only. This is probably because these banks would be returning capital back to the government, which means that the government stake in these banks is set to reduce. However, the appreciation in the prices of these stocks is mainly due to possibility that the number of outstanding shares of these banks will reduce, thus improving valuations further.

The Indian auto ancillary sector seems to have come of age and this is reflected in the investor optimism towards this sector. The sector, basically represented by two stocks has gained over 50% in market capitalization. While this sample is not indicative of the whole sector, gains have been registered in other auto ancillary stocks that are not part of the BSE-100 index. Performance of these companies in FY03 has been the main stimulant for investor interest in this sector. Bharat Forge for instance, had posted a 50% increase in net sales, largely due to the 146% increase in its export sales in FY03. Exports contributed around 40% of total revenues in FY03.

Due to the interest of foreign automobile companies that are looking at India to source auto components, exports have shown strong growth in FY03. Indian auto ancillary units have become more competitive and quality oriented and this has helped them venture into new markets abroad. Going forward investor interest is likely to continue as the export potential in this sector is huge and is yet to be tapped fully.

So although software stocks are out of favour, not only are old economy sectors like engineering, aluminium, cement and steel stocks making a comeback, the optimistic sentiment is showing no signs of abating. FMCG and auto stocks could see interest subject to rain gods smiling. While some sectors have gained strongly in the recent past, investors should look to invest in companies with strong management vision and their relative position in the industry.

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