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Stock markets: Will it happen again?

Oct 8, 2004

Last one year has been one of the most eventful years in the stock market history in India. In this period, we witnessed a strong rally in the market boosted by FII inflows and we have also seen one of the greatest market crashes in the history (17th May). There were many gainers last year. But there were losers too. In this article, we take a look at top gainers and losers in last one year (till date) and try to find out the reasons for the same.

Losers over the year…
COMPANY PRICE ON
Oct 7, 2004 (Rs)
PRICE ON
Oct 6, 2003 (Rs)
%
CHANGE
BSE-SENSEX 5,766.004,631.3924.5%
S&P CNX NFTY 1,817.001,478.9022.9%
HLL 128.35191.55-33.0%
DR.REDDY'S756.91,108.80-31.7%
BPCL 350.25382.05-8.3%
HPCL 324.2352.5-8.0%
Gainers over the year…
COMPANY PRICE ON
Oct 7, 2004 (Rs)
PRICE ON
Oct 6, 2003 (Rs)
%
CHANGE
BSE-SENSEX 5,766.004,631.3924.5%
S&P CNX NFTY 1,817.001,478.9022.9%
BHARTI TELE 155.275106.9%
HCL TECH. 376.4185.5102.9%
TATA POWER 332.519570.5%
GRASIM 1,154.00680.169.7%

Losers
While the list of gainers may not be surprising, it is the list of losers that evokes a surprising reaction from a certain section of investors for it contains names that were supposedly once the blued eyed boys of the stock markets.

HLL is the biggest under performer in last one year with a loss of 33%. The basic reason for this loss in the market value of HLL was the consistent decline in the company's topline growth and also the impact on margins, which led to the de-rating of the stock. In the past few years, HLL has consistently enjoyed very high margins, thanks to its management practices as well as market leadership in all the major FMCG segments. However, the fact is that in a growing economy like India, such high operating margins encourage competition. Thus, over the last 1 to 2 years, the company has actually lost its market share to regional players. Also, it had increasingly become difficult for HLL to raise prices or for that matter even maintain them due to high competition, thus hurting margins. Another concern over the years has been the company's inability to launch successful new products. The lack of new growth drivers is the key cause of concern.

Dr Reddy's is again one of the biggest losers in the bourses with a loss of about 32% in market capitalization. The stocks ran up in anticipation of favorable judgement in case of 'Amlodipine Maleate'. However, with the reversal of the lower court's judgment (which was favourable to Dr Reddy's) by the federal court, the stock collapsed under its own weight of expectations. Apart from the judgment, a dismal performance in US market further led to investor agony. The company's performance in the recent past has been disappointing. There has been a decline in revenues from the US generics market and also a fall in the company's margins. The operating margin declined to 18% in FY04 from 29% in FY03. With no new major drug launches and a changing business mix, the stock's risk profile has changed for the worse.

The two integrated oil companies BPCL and HPCL are also among key losers. After witnessing buying interest during the latter part of the FY04 in anticipation of their disinvestment, the stocks fell from grace with the change in the government at the centre. The new government put the much-awaited disinvestments on back burner. Also, high crude prices during the last one-year coupled with government's freeze on retail prices resulted in erosion of profits.

Gainers
Having gone through the list of losers let's look at the top gainers, in the past one year.

Among the gainers, Bharti Tele figures prominently. Rapid growth in the subscriber base and strong financial performance in FY04 led to this sharp gain in the stock price. The company has been one of the oldest mobile services providers and its focus has enabled it to grow into the largest (by subscriber numbers) mobile telephony services provider in the country. With an addition of over 1.5 m subscribers in a month, Bharti Tele is well placed to capture the growing demand for telecom services in the country. The company is also present in the basic and long distance telephony segments.

Another company from the technology sector, HCL Tech is amongst the top gainers on NSE. The stock gained by almost 102% in the last one year. The reason for this could be attributed to the business restructuring that was initiated by the management in the beginning of the previous year and the consequent growth in revenues and profitability. More importantly, the core business that had been suffering on account of the management's increased focused towards the inorganic businesses, seems to have come back on track now. As a result, not only has the company been able to grow its volumes strongly, but also has managed to bargain higher billing rates for certain high-end services. The employee addition has also been strong, which shows the confidence of the management.

Tata Power, the largest private sector power company, gained around 70% on the bourses in last one year. The reason for power stocks to outperform the Sensex in last one year is the combination of two things: promising growth prospects and the confidence that Electricity Act 2003 has enthused amongst investors. Private players have announced their capacity addition plans and from that aspect, we believe the party is yet not over.

Grasim, a well-diversified company, has been amongst the major gainers on the bourses. Because of a shortage in cotton (lower production), VSF gained as a substitute fiber and consequently, Grasim saw strong growth in its VSF division. Apart from this, the acquisition of cement business of L&T (Ultra tech Cemco) also added to the positive momentum. It has now become the largest cement manufacturer in the country. The strength in sponge iron prices is an added cushion.

Whether such gains are likely to accrue in the future? May not be. Investors need to keep in mind the fact that the last year saw a secular bull-run. It would have been indeed a rare case. Despite promising fundamentals, we suggest investors to exercise caution at the current juncture. Pick and choose!


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