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Heavyweights: The big 5

Sep 26, 2003

Markets have run up in the last one-year after witnessing sluggishness for nearly last three years. While the BSE Sensex has gained about 44%, the Nifty on the other hand, also gained about 42%. Let us take a look at how the top five index heavyweights (their weightage is about 45% in the Sensex) have performed during the same period. Banking stocks had witnessed a significant run up in the current bull run. Index heavyweight, SBI, also gained significantly (up 82%). Of the five major heavyweights, SBI is the top gainer. SBI is the biggest bank in India having a pan India presence. The bank has been a consistent out performer and is undergoing a massive restructuring exercise in terms of streamlining its various processes, especially on the technology front. It is also looking at improving its productivity by VRS initiatives. All this would help it reduce costs significantly, thereby improving its profitability. On a consolidated basis, the company faired even better than on a standalone picture. All this factors have improved sentiment towards the stock. The company would also be the biggest beneficiary of the Securitisation Act in the long run.

Company 24-Sep-02 25-Sep-03 % growth Weightage
in Sensex *
in Nifty
Sensex 3,022 4,342 43.7% - -
Nifty 966 1,369 41.7% - -
SBI 233 424 82.2% 6.6% 5.0%
Reliance 255 423 66.0% 13.1% 10.0%
Infosys 3,407 4,498 32.0% 8.7% 6.6%
ITC 686 820 19.6% 5.9% 4.5%
HLL 177 182 2.7% 11.8% 8.9%
* The weightage is calculated on the basis of total market cap (not free float).

Reliance, the other heavyweight, also outperformed the indices in last one year. It performed significantly better, both in its refinery and petrochemicals business in FY03. The company is expected to perform better in the current year on account of improving margins in case of its petrochemicals business. The petrochemicals cycle is on an upturn. Its refinery segment might however, witness pressure on margins. Its natural gas business also poses promising potential in the long run. Its various acquisitions like power are also likely to bear fruits in future. However, one should bear in mind the risks on account of huge capex plans the company has. The promoters have recently entered into telecom in a big way. However, the regulatory aspects of the segment it has entered in are not very clear. Overall from a long-term perspective, the prospects of the company look promising.

The other three heavyweights - Infosys, ITC and HLL under performed the indices during the same period. Infosys gained about 32% during the last one year. During the start of the financial year FY04, Infosys gave a cautious outlook indicating that the sector would witness pressure in billing rates owing to slowdown in global IT spending. Also, many global players are planning to set up their own offices in India and this would increase competition in the sector. This dampened sentiment towards the stock. However, during the last one month, sentiment has improved towards the stock on account of hopes that increase in hardware demand would lead to increased software demand leading to growth in the sector. But in the short term, the prospects of Indian software companies continue to depend heavily on the US and to that extent only seasoned players (like Infosys) are likely to sail through.

ITC gained about 20% during the same period. The company is the market leader in cigarette business having a share of about 70% and has a very good product portfolio in that segment. The company is trying to de-risk its business by focusing on paperboards, hotels, staple foods and retailing. All this is starting to show affect on its revenue mix, with contribution from tobacco steadily declining. Although initiatives like food and retailing are likely to take some years to break even, paperboards and hotels are already showing results. On the whole, the company has much to look forward to.

FMCG major, HLL, on the other hand gained only 3% YoY. Poor monsoons in 2002 resulted in sluggish demand in case of this FMCG sector. This apart due to increasing competition, the companies resorted to price cuts in order to gain market share. Also, HLL was in the throes of restructuring that saw it aiming to prune its brand folio and hive off non-core businesses. As a result, the companyís last year performance was unexciting. Now that the monsoons have been better than normal in the current year, agriculture is expected to post a robust growth in the current year. This is a good sign for the FMCG sector. The effect would however be seen with some lag. This apart, the restructuring of the portfolio towards core brands is also expected to bear fruit for the company in the long run. Also, given the fact that per capita consumption of most categories in FMCG is still low as compared to the developed countries, Indian FMCG sector offers good growth opportunities. HLL, the market leader in FMCG, is likely to be a key beneficiary of this upturn backed by its vast distribution network in the long run.

All in all, going by the potential these companies have in the long run, it is a good sign for India Inc. and consequently, the stock markets. One must however, remember that these 5 are only examples, and there are 25 other stocks in the Sensex and 45 others in the Nifty, that can also make a difference to the direction that the indices take from here on.

In our view, notwithstanding the recent spurt in the valuations, one should remain invested in Indian equities, as they are likely to provide good long-term growth opportunities. Once again, picking quality stocks is the key to success. By the term quality stocks, we mean companies having good management, sound business model, long-term vision and focus, expertise to run the business and past track record. Happy investing!

Also read: Dr. Marc Faberís view on global markets

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