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Bulls of the Bear market

Dec 4, 2008

Recently, a leading business daily published the results of a research it conducted on the companies that managed to survive the last bear market. The universe under consideration was the BSE 100 companies. Eventually, four companies popped up. These were Hero Honda, Tata Power<>/a, ITC and HDFC Bank. As per the daily, these companies had outperformed the broader Sensex during the last bear phase of April 2000 to April 2003. Apart from their much envied pedestal and leadership positions, there is very little that is common between these companies. They belong to four different sectors and as a consequence, deal with completely different products. It would be interesting to know the key factors that make them converge to the same list of toppers despite their vastly different product profiles. Insight into these factors could help one apply the same techniques in the current bear market.

Stockmarkets:Bear market outperformers
Source: CMIE

We believe the factors that led to the outperformance of these companies were sound economics of the business and an excellent management pedigree. As far as the former is concerned, all the companies mentioned above deal with products that are non discretionary in nature. In other words, their products are less immune to business cycles. It could well be argued that auto is highly cyclical and hence, Hero Honda's presence is non-conforming to the hypothesis. However, if one takes into account the abysmally low level of penetration that was prevalent at that time and also extremely low levels of vehicle financing, then it becomes quite evident that the two-wheeler segment had not quite turned cyclical. Another aspect of the business economics that struck us was the cash generating ability of the companies, except of course HDFC Bank. The other three companies generated ample cash flow that only eliminated the need for access to outside capital markets for capex funding but it also enabled these companies to pay out attractive dividends.

In the case of HDFC Bank, risk management is of the essence and the firm's management is perhaps the best exponent of the same in the domestic banking industry. Talking of management, the remaining three companies have also been blessed with excellent management that ensures that revenues are maximized and costs minimized.

To conclude, look for companies that have sound business economics, sell products that are largely non- discretionary in nature, are leaders in their respective industries and have management of the highest quality. If bought at attractive valuations, you are unlikely to go wrong over a suitably long horizon of 3-5 years.


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