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Erstwhile blue chips do a Titanic - Views on News from Equitymaster
 
 
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  • Nov 7, 2000

    Erstwhile blue chips do a Titanic

    That we’ve been going through a bear market is no news. What is more surprising however, is the severity of the bear market. In a small exercise we at equitymaster calculated the returns if one bought one share in each of the Sensex scrips in November 1994 and held them for six years till October 2000.

    The results were surprising, or rather shocking. Except for the five scrips, viz. HLL, ITC, Nestle, Glaxo and Reliance all, the other 26 scrips of the Sensex have given negative returns! Infact, destroyers of capital would be a better terminology. The list ranges from the auto majors Telco, M & M, Hind Motors and Premier Auto and engineering companies Bharat Forge, L & T, Siemens and Voltas to steel (Tata Steel, Mukand), textile (Bombay Dyeing, Century, Indian Rayon, Grasim), cement (ACC) and paper (Ballarpur) companies.

    In 1994, almost all these companies set out to set up huge capacities to prepare for a post–liberalisation scenario. However, six years down the line most of these companies are down in the dumps, afraid of imports and not able to survive the chilly winds of competition. And with the World Trade Organisation forcing the further opening up of the economy post 2001, most of these companies, with a few honourable exceptions of course, are slated to go down the tube. Today it is even difficult to believe that it was scrips such as Century, Premier Auto and Voltas were called blue chips in the early nineties.

      3rd Nov '94 30-Oct-00 % Gain/Loss CAGR (%)
    HLL 68.5 173.7 154% 20.4%
    ITC 400.0 752.8 88% 13.5%
    Nestle 283.5 520.7 84% 12.9%
    Glaxo 262.5 430.5 64% 10.4%
    Reliance 197.2 301.3 53% 8.8%
    Cummins 330.0 324.0 -2% -0.4%
    Hindalco 767.1 726.4 -5% -1.1%
    M & M 222.0 131.7 -41% -9.9%
    L & T 295.0 149.9 -49% -12.7%
    Bharat Forge 202.5 98.5 -51% -13.4%
    Siemens 576.6 275.2 -52% -13.8%
    Tata Power 150.0 68.4 -54% -14.5%
    GE Shipping 75.0 32.8 -56% -15.3%
    ACC 241.7 91.0 -62% -17.8%
    Indian Hotels 625.0 193.8 -69% -20.9%
    Tata Steel 315.0 95.9 -70% -21.2%
    Grasim 760.0 199.6 -74% -23.5%
    Indian Rayon 259.4 67.9 -74% -23.5%
    Ballarpur 292.5 73.7 -75% -24.1%
    Phillips 362.5 90.1 -75% -24.3%
    Bombay Dyeing 470.0 112.3 -76% -24.9%
    Telco 337.5 70.8 -79% -26.8%
    Ceat Tyres 130.0 26.7 -79% -27.1%
    Voltas 145.0 27.1 -81% -28.5%
    Hind Motors 42.0 7.4 -83% -29.4%
    GSFC 232.7 21.7 -91% -37.8%
    Indian Organic 91.3 8.0 -91% -38.5%
    Premier Auto 75.0 5.2 -93% -41.4%
    Century 397.5 27.4 -93% -41.5%
    Mukand 350.0 21.6 -94% -42.7%
    Total 8,956.8 5,125.4 -43% -10.6%

    More importantly the promoters of these companies turned out be paper tigers. There have been issues in business magazines which have carried the promoters of these companies as the best managers and these companies as the best managed companies. Any one investing on the basis of these opinions would be wondering what has hit them!

    Coming to the winners, Hindustan Lever remains the best company to have invested your money in. A part of the reason being that HLL consolidated operations in India over the past six years taking over Tomco (from the Tatas), Dollops (from Cadbury), Kwality (renaming it Kwality Walls) merging group companies Brooke Bond, Lipton, Ponds which has led the company in emerging as a Rs 100 bn conglomerate. Simultaneously, HLL continually focused on its rural distribution initiative, which has enabled it to emerge as a top of the scale mass market player.

    Nestle has been following in HLL’s footsteps, with almost the same pricing policies. It is emerging as a mass market player with a foray into mineral water and milk. ITC ofcourse is a cigarette major with an almost 70% market share in the Indian market and its ability to raise prices is legendary despite excise duties comprising more than 50% of its turnover. Glaxo's top of the line prescription brands and continuous focus on disinvesting unproductive assets have enabled the company to emerge as one of the most respected companies. The continuous backward integration (with huge capacities) right from fabrics, fibre intermediates, commodity plastics to basic building blocks has enabled Reliance to stay competitive and reap the benefits of economies of scale.

    A common factor among the market capitalisation winners is a continual focus on return on invested capital and return on equity, which has enabled them to survive the onslaught of imports, retain market share and keep costs under control. And the winners speak for themselves. Three of them are FMCG majors where brands have given the companies pricing power. Infact even Glaxo wouldn’t be too different from this category. Reliance is the only commodity player to have emerged a winner primarily because of its ability to manage scale economies, implement projects on time and seek out innovative sources of finance. In other words, its been the very antithesis of the way commodity companies have been managed in India.

    These are the very parameters which investors ought to seek out in stocks. Otherwise, the returns in the next six years won’t be too different either!

     

     

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