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Tone down expectations

Oct 3, 2003

Going by the trend in the stock markets over the last six months or so, indications are that there is no stopping at this point in time. Though there are apprehensions about the forthcoming election, the undertone is bullish. If one were to look at the top five gainers over the last month or so, large market capitalization stocks are completely absent. Just to put things in perspective, the top gainers list in the BSE 'A' group goes like this HCL Infosys, Aurobindo Pharma, Sesa Goa, Moser Baer and Saw Pipes. Except from some stocks like Ashok Leyland, P&G, M&M, Infosys and Zee, the top 25 gainers list consist primarily of mid-cap stocks.

Top 5 gainers…
CompanyPrice (Sep 1st, 2003)Price (Oct 3rd, 2003)(% change)
Sensex 4,325 4,531 4.8%
Nifty 1,376 1,446 5.1%
HCL Infosys 159 310 94.3%
Sesa Goa 223 310 39.0%
Aurobindo Pharma 483 663 37.3%
Saw Pipes 168 230 36.6%
Moser Baer 283 386 36.2%

Domestic small cap pharma stocks have been in the limelight in recent past on account of various factors like huge outsourcing opportunities, R&D thrust and industry consolidation. However, our view is that of caution. Even bigger players like Ranbaxy and Dr. Reddy with a relatively strong balance sheet are finding it difficult on the R&D front. Outsourcing offers significant growth prospects in the long-term. But whether all companies will benefit from this trend remains an area of doubt (look at the software sector).

On the other hand, stocks in the top five losers in the BSE 'A' group is hardly surprising. Shree Rama Multitech, Pentamedia, DSQ Sofware, Wockhardt Life, Chennai Petro and Silverline. Barring Chennai Petro, none of the other stocks have strong fundamentals to support the rise during the recent rally. With the BSE also taking some action in these speculative counters, the loss has been significant.

Top 5 losers…
CompanyPrice (Sep 1st, 2003)Price (Oct 3rd, 2003)(% change)
Shree Rama Multitech 9 6 -36.5%
Pentamedia 12 8 -28.8%
HFCL 27 21 -22.8%
Silverline 7 6 -21.7%
DSQ Software 10 8 -21.2%

Given this backdrop, one wonders whether the premise of some stocks gaining ground is strong or not.

  1. Are investor's buying a stock because the stock market, as a whole, is showing positive signs? Or,

  2. Are investors buying stocks based on the fact that fundamentals are looking strong?

The latter seem to be a safer option from our perspective. This is important because the risk return profile of stocks have changed when one considers the recent rally. Though the long-term prospects remain promising, probably, it is time to tone down return expectations from equities in the future.

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