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Nifty: Bottom five

Jun 26, 2008

After having risen consecutively for six years, law of averages seems to have finally got the better of stock markets. Since the start of the current calendar year, Nifty, the market benchmark, has lost around 30% of its value. Furthermore, going by the current macro economic scenario and the weakened sentiments, it looks unlikely that it might end the year in the positive. Around 50% of the stocks comprising the Nifty have fallen more than 30% since the beginning of year 2008. The top five worst performers have each declined by more than 50%. Let us have a look at these companies and find out the reasons behind their dismal performance.

Company % Returns
Unitech -62.2%
DLF -57.5%
Reliance Infrastructure -54.9%
Siemens -52.1%
Tata Communications -49.8%
Note: Prices as on June 23

'Real'ty hurts
The top two losers, Unitech and DLF, come from the real estate sector, an industry that was the apple of the eye of investors just a few months back. Share prices of these companies have plunged 62% and 58% respectively so far this year. Rising interest rates, falling property prices, execution delays and squeezed margins are some of the primary reasons associated with the erosion in market values of these companies.

'Power'ful correction
Reliance Infrastructure ltd, formerly known as Reliance Energy has seen is market value eroding a huge 55% so far this year. Although the company does have meaty plans for the future, it should be borne in mind that the company's projects have long-gestations periods, where delays are difficult to avoid. However, the investors, in their exuberance overlooked this simple fact and started according premium valuations to the company. The result? Painful correction and wealth erosion for shareholders who bought into the stock at its peak.

Siemens, the engineering behemoth, has seen its stock face one of its worst times in six years and is already down 52% since the start of 2008. The poor showing can be attributed to the cost escalation pressure faced by company due to delay in project executions. Moreover, lower revenue growth coupled with tepid order inflow translated into lower visibility about company's earning potentials and this led investors to make a hasty exit.

The odd man out
Tata Communications, the last name on the list and the only company to not belong to the real estate or the infra space has also lost a good 50% since the start of 2008. However, it was the worst performer among its peers in the telecom sector. The company has had a lackluster FY08 and is facing pressure, mainly on the overseas subsidiaries front. Furthermore, rupee appreciation also did not help matters. However, we remained enthused on account of the huge capex plans being undertaken by the company, benefits of which will start accruing in the medium term.

Overpaying hurts
To conclude, the above-mentioned stocks are all leaders in their respective industries and do have a good future. But even the best of stocks are brought back to ground if taken to exorbitant valuation levels. Hence, the key is to not overpay no matter how good the company and to always insist on a margin of safety.

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