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Stocks that bucked the trend in 2008

Dec 31, 2008

The year 2008 challenged every myth and would be preferred to be forgotten by the investor fraternity. The collapse of global stock markets, asset prices and commodities led to an unprecedented fear psychosis in the minds of investors. However, despite the turmoil in the markets, 5 stocks from the BSE A group managed to outperform. In this article we highlight those 5 stocks that have bucked the trend - HUL, Colgate, Nestle, GSK Pharma and Hero Honda – and analyse the rationale for the same.

What is noteworthy is the fact that 3 of the 5 stocks were FMCG stocks. The reason why they continued to outperform the broader markets was the sustenance of India’s structural growth and consumption story. Rising income levels, low penetration, increasing consumerism, new product introduction and up-trading aided the FMCG sector. Further; FMCG companies enjoy strong pricing power and debt-free balance sheets.

Hindustan Unilever (Returns in - 2007: -1.2%, 2008: 15.7%)
Hindustan Unilever: Rs 100 invested is now worth...In the current situation of extreme uncertainty, HUL is amongst the very few stocks that have managed to not just evade value erosion but also give decent returns on an annualised basis. HUL, 51% subsidiary of Unilever, continued to be India's largest consumer products company. HUL’s presence in all categories in the FMCG sector is something no other company can boast about. Powerful brands (market leader or holds the 2nd podium) large product offerings across price points, extensive distribution network, strong balance sheet and strong management made it one of the better-placed companies. Though input costs and competition remained a concern, its restructuring exercise, focus on improvement in quality of earnings, pruning brand portfolio and strong sector potential helped it survive the downward spiral.

Hero Honda (Returns in - 2007: --11.0%, 2008: 16.1%)
Hero Honda: Rs 100 invested is now worth...Tough conditions prevailed in the domestic two-wheeler industry during the year as credit squeeze and high interest rates acted as demand dampeners. Therefore, it is surprising to find Hero Honda’s name in the list of winners in 2008, especially given the fact that all the other names belong to the so called ‘defensive’ sectors. Credit indeed should go to the prescience of the company’s management team, which countered the adverse industry trends by expanding Hero Honda’s distribution network deeper into the country’s hinterland and also launched new models. That the company chose to postpone the commencement of its new plant despite the tax benefits on offer also spoke volumes of the management’s focus on costs. As a result of these measures, the company’s volumes grew by 20% and its bottomline by an impressive 47% YoY during the first half of the current fiscal, a period where other players struggled to even match last years’ volumes and profit numbers. Little wonder, the stock managed to weather the downturn.

GSK Pharma (Returns in - 2007: --11.3%, 2008: 11.2%)
GSK Pharma: Rs 100 invested is now worth...While stocks across sectors bore the brunt of the investors’ ire in 2008, the pharma sector was not impacted as much as the other sectors (barring FMCG) by the economic slowdown and the plunge in the stockmarkets. Infact, one pharma stock which had a stellar year in comparison to its peers was GSK Pharma. As has been in the past, the company continued to enjoy superior operating margins (37.4% in 9mCY08), which are one of the best in the sector. Not only that, its strategy of focusing on its priority products, which account for a third of its revenues and increasing the contribution from the chronic therapy segment through in-licensing opportunities and brand acquisitions has been obviously paying off well. GSK Pharma has a strong balance sheet with virtually zero debt and no capex plans. Besides this, the company is also sitting on surplus cash and investments. It enjoys strong return ratios with a return on equity and return on capital employed of 30% each. No wonder then that its stock price performance did not mirror the overall weakness in the markets.

Colgate (Returns in - 2007: 3.9%, 2008: -0.3%)
Colgate: Rs 100 invested is now worth...Colgate is the market leader in Indian oral care segment which continues to be an under-penetrated category. Its solid franchise with dentists and its rural distribution strength, combined with aggressive new-product launches aided it to enhance its market leadership in the toothpaste, toothpowder, and toothbrush categories. A name synonymous with the Indian oral care industry, company’s strong distribution reach and branding power aided its growth. Though presence in virtually single category and increasing competition posed a threat, increasing awareness and advertising campaigns coupled with rising penetration of oral care products in India and expansion of capacities in the tax haven region by Colgate made it a safe and sound investment for 2008.

Nestle (Returns in - 2007: 30.6%, 2008: -3.0%)
Nestle: Rs 100 invested is now worth...Though the stock has given a negative return of 3%, it has largely outperformed the BSE Sensex which lost as much as 52% this year. The undisputed leader in the underpenetrated food processing segment, Nestle is a pure play on the urban consumption story. Being a 62% owned subsidiary of Nestle SA, it boasts of popular brands are Nescafe, Milkmaid, Maggi, Kitkat and Cerelac. Witnessing a 25% YoY growth over the last 7 quarters, its capacity to introduce new products, pricing power and ability to sustain strong volume growth were tested this year. Further, being the most capital efficient companies with an average return on net worth (RONW) of 85% over the last 5 years provided the extra stimulus.


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