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August scorecard: Who came to the party?

Sep 1, 2004

The month of August remained a rather lackluster month for the Indian stock markets. Perturbed by steep increase in crude prices and the subsequent rise in inflation, markets remained largely range bound and were able to muster just marginal gains. Infact, advancers were beaten by the decliners in the ratio of 1:2 i.e. for every one stock that witnessed gains on the bourses during the month, two stocks posted losses. However, among the gainers, there still emerged certain stocks that rose by a significant margin. Let us have a look at the top five gainers on the BSE-Sensex during the month of August 2004.

 30-Jul-0431-Aug-04% Change
SENSEX5,170 5,192 0.4%
Gujarat Ambuja278 324 16.6%
Grasim981 1,118 14.0%
Bajaj Auto822 933 13.4%
ACC240 269 12.4%
Reliance Energy583 653 12.0%

With gains of nearly 17%, Gujarat Ambuja, the lowest cost producer of cement in the world, emerged as the top grosser among the Sensex stocks. Infact, three of the top five slots have been occupied by the three biggies of the Indian cement industry. It has to be remembered during the bull run of the last fiscal, cement stocks were not exactly in the limelight and some of these companies had under performed by a significant margin. The reason for this was two-fold. First, until the end of 2003, the growth in despatches was a modest 4% and secondly, due to considerable overcapacity in the industry, realisations were rather unremunerative. The tide, however, began to turn for the good from January onwards and helped by strong despatches during the last quarter (4QFY04) of the previous fiscal, the cement industry managed to close the year with a rather respectable growth of around 6%.

While the demand growth did soothe investors' nerves, what further encouraged them was the rise in prices that followed and which have continued till date. Just to put things in perspective, majors like ACC and Grasim have reported realisations improvement in the region of 12% to 15% during 1QFY05! We believe all the three players are well poised to take advantage of the growth opportunity. While Gujarat Ambuja enjoys the highest operating margins among all the companies, ACC benefits from its pan Indian presence and high operating leverage, which comes in handy in times of hardening of cement prices as it directly adds to its bottomline. Grasim on the other hand has economies of scale by virtue of it being the largest cement producer in the country. Thus, we believe that promising prospects lie ahead for these cement majors.

Having appreciated by more than 13%, Bajaj Auto, the second largest two-wheeler manufacturer in the country, is one of the two non-cement gainers on the Sensex over the last one month. From being predominantly a scooter manufacturer, the company has come a long way and is now the second largest motorcycle manufacturer in the country, a segment that has grown at a CAGR of 30% in the last five years. The gains in the last one-month could be attributed to the strong performance of its latest entry level offering ‘Boxer CT100’, as it has been able to wrest the top slot from its closest competitor Also, the buzz around its soon to be launched ‘Discover’ seems to be positive and if successful, could help the company make inroads into the executive segment. This segment accounts for more than 50% of all the bikes sold in the country and the company does not have a significant presence in this category. However, its presence in the rapidly declining gears scooters segment and a large investments portfolio does raise some concerns.

Reliance Energy, which has gained nearly 12% over the last one month, is the fifth highest gainer on the Sensex during the last one month. The stock had been lying dormant for quite some time now as there was no major announcement. Earlier, the company had incorporated Reliance Energy Generation Ltd, a Special Purpose Vehicle (SPV), to develop a 3,740 MW gas based power generation project at Dadri in Western Uttar Pradesh. But investors must remember that it takes time for new project to be set up and yield results. On account of the convertible foreign currency borrowing (FCB), there are possibilities of further dilution of equity going forward (i.e. earnings per share could grow at a slower rate). With the growing equity base, if things turn unfavorable for REL, there can be a negative impact on the EPS number. To that extent, the risk-reward ratio remains unfavorable. At the current juncture, the valuation of the company looks steeper as compared to its peers.

Amidst gainers, what is noticeable is also the fact that the Sensex has moved up by only 0.4%. What this highlights is that irrespective of how the benchmark index is moving, there are companies with good long-term growth potential. It is better not to follow the index. Equities, we believe, are likely to yield better returns with a two to three year perspective compared to other investment avenues. Having said that, the stock market is also faced with challenges (impact of higher crude prices, firm inflation and possibility of interest rates heading northwards). Nevertheless, we suggest investors to invest in equities in a staggered manner so that risk is spread over a period of time.


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