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Nifty spoilsports

Aug 27, 2003

There have been just bulls on the bourses. Every single day has been a good one for the stock markets, or so it seems. The situation so far has been like 'put your money in any stock, and you are sure to come out a winner'. That's pretty much what the scenario has been in the last one year for the stock markets. However, amongst this bull rampage and the money spinning being witnessed since the last one year, there have been some stocks, which would have proved your bet wrong and caught you on the wrong foot.

Nifty losers in the last one-year
COMPANY August 26, 2002
August 26, 2003
S&P CNX NIFTY 999 1,322 32.4%
WIPRO 1,257 982 -21.9%
HCL TECH 201 168 -16.6%
GSK CONS. 295 260 -12.0%
NIIT 148 132 -10.5%
VSNL 128 118 -7.9%
SATYAM 226 208 -7.6%
DIGITAL GLOBAL 481 446 -7.4%
CIPLA 919 909 -1.0%
ZEE 107 106 -1.0%
MTNL 131 130 -0.8%

Above is a list of the losers on the Nifty in the last one year. As can be seen in the table above, software stocks clearly dominate the list. While the Nifty has gained 32% in the last one year, some software stocks have lost in the region of 7%-22% during the same period. Since, software forms a major chunk of the above list, let us begin with the same.

The year gone by has been one more year of tough times for the Indian software sector. While there were companies like Infosys that were able to weather the storm, arising from the global economic slowdown, signs of pressure were clearly visible on the performance of some other domestic IT majors like Wipro, Satyam, Digital, NIIT and HCL Tech. And similar was their performance on the bourses. These Indian software services companies have been facing challenges in forms of increasing MNC competition, pressure on billing rates and increasing attrition rates, to name a few. While these pressures are likely to continue in the near-term, any clear picture with regards to improvement in the overall situation is yet to emerge.

Now let us look at a couple of reasons why MTNL and VSNL have under performed in the last one-year. The deregulation of the telecom sector saw these two companies facing serious competition. While VSNL lost its monopoly in the International Long Distance (ILD) segment, MTNL saw its revenues take a hit in the Mumbai region with the arrival of Hughes Tele. It must be noted that MTNL operates in two circles only - Mumbai and Delhi. Also, given the steep fall in domestic and international long distance rates, MTNL's share of the same came down. However, the situation could have been worse for the two stocks if not for the recovery witnessed since the last few months. MTNL's recent spurt could be attributed to the new tariff regime for basic operators with free calls have been halved and reduction in average local calls duration. The recent gains in VSNL seem to be on the expectations of benefits arising due to the synergies between the Tata Group and VSNL.

The other losers on the Nifty were Cipla, Zee and GSK Consumer Healthcare. The reason for Cipla's underperformance could be the fact that unlike its peers, the company has a larger exposure to the domestic markets, which remained lackluster. Moreover, uncertainty over the approval of CFC-free inhalers and delay in regulatory approval for products for which Cipla is the bulk supplier could be weighing down on the stock. For Zee, on the other hand, the delay in implementation of CAS, is creating the uncertainty, and has been taking a toll on the stock. This ambiguity could affect the ad revenues, as the advertisers would restrict their ad spend unless the situation becomes clear. The stock had lost substantial ground during the Cricket World Cup as viewership and consequently the ad revenues of the channel took a hit. Now we come to the final loser, GSK Consumer Healthcare. Notwithstanding the recent good results by the company, we feel that the company's single-product focus makes it susceptible to a high degree of risk and hence the stock could have underperformed.

Having discussed the Nifty spoilsports above, it brings out one point clearly - performance of a stock depends to a great extent on the fundamentals of the company. Hence, like always, we would like to end reiterating our stand that invest from a medium to long term perspective in fundamentally sound companies with sustainable business models and credible management and wait for the companies to deliver.

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