Sep 17, 2009|
The story of Tata Steel & the credit crisis
A while back we wrote an article discussing the different factors that influence the price of a stock. We began by saying "The prices of stocks constantly fluctuate as buyers and sellers haggle towards a mutually agreeable price to buy or sell at any point of time. But can it be that the fundamental worth of each of those companies is actually changing every minute? And is that fundamental worth the only thing that determines the changes in the prices of stocks?"
What better case study than India's premier steel company Tata Steel to answer those question. Its price over the last one year or so has been nothing short of a rollercoaster ride, with some very extreme fluctuations in either directions. It touched just about Rs 1,000 in October 2007. Astonishingly, within a span of just one year, by December 2008 it had fallen to a low of Rs 149. A company that was being valued at Rs 603 bn in the market was suddenly being valued at only Rs 108 bn within the matter of a year, a fall of over 80%. At that price, Tata Steel was trading at a P/B of merely 0.4 times!
So, Corus was performing badly and was said to continue to do so for some time. The economic outlook was uncertain and most major economies were forecasted to perform badly for the next year or so. That's it, nothing else had changed. It was the same company, with the same management, and the same business, but was now being valued at dramatically low levels. Could there be any justification for that? The adjoining chart may offer some clues.
|Note: The price of Tata Steel has been divided by 30
for the sake of appropriate graphical presentation with the theme of the article.
Data Source: CMIE Prowess
The fall in price that ostensibly seemed due to a grim outlook, actually had many more layers to it. One of them was most definitely the heavy selling activity from FIIs (foreign institutional investors) in a very short period of time. These institutions presumably had to meet many commitments back home. Redemption pressure from their own investors and an extreme liquidity crunch in their home countries could be two such reasons why they had no option but to sell, even if that meant receiving very bad valuations for their stock. And so began the distressed selling where FIIs reduced their shareholding in the company from 20.55% at the end December 2007 to a low of 12.98% at December end 2008, causing company's share price to get beaten down to some very irrationally low levels. So there's the culprit!
What is also interesting to note is how the momentum of buying and selling by FIIs caused a momentum in the share price that lasted much after the buying and selling by these entities stopped. For example, when FIIs were aggressively buying between March 2007 and June 2007, the rise in the share's price lasted much after the buying stopped.
The story is somewhat similar on the downside. An explanation for that could be that when the price of a stock is seen rising or falling in a big way for an extended period of time, speculation becomes rife in the stock, with speculators trying to cash in on the momentum. However, after a certain point, the speculator's themselves start affecting the stock's price in what can be called a self-fulfilling prophecy, until the time that such a price (either too high or too low compared to fundamentals) is no longer sustainable.
Did all this have anything to do with Tata Steel's business or its standing as a company? No. Did that stop it from affecting its share price? No!
And so, the moral of the story is that the price quote of a stock you see everyday does not always reflect the fundamental worth of the company. A intelligent investor will always do well to take advantage of these differences from fundamentals by either buying or selling the stock when the price gets way out of sync with its fundamentals.
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