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What ailed the key underperformers of 2009? - Views on News from Equitymaster
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  • Dec 31, 2009

    What ailed the key underperformers of 2009?

    The rise in the stock markets post March 2009 is probably the sharpest we have seen in over a decade or so. The BSE-Sensex has risen by around 81% during the year. However, there were a few stocks that missed out on this rally. In this article, we have highlighted the top five stocks that underperformed the benchmark index.

    The list goes as follows - Reliance Communications (telecom), HUL (FMCG), NTPC (power), DLF (real estate) and Sun Pharmaceuticals (healthcare). The reasons for these stocks to have underperformed the overall markets are very subjective. These vary from poor results, to a turn of events in their respective industry, to an unfit balance sheet, amongst others.

    It must be noted that we have only highlighted stocks that form part of the BSE-Sensex. Also, we have only included the top loser/ underperformer of various sectors.

    Reliance Communications (Returns in - 2008: -70%, 2009: -24%)
    Giving a negative return of 24%, Reliance Communications (RCOM) was the top loser amongst stocks forming part of the BSE-Sensex during 2009. There are two key reasons for the same -its poor financial results and its issues with the DoT (Depart of Telecommunications). The reason for the former was a sharp decline in key operating parameters such as ARPUs and ARPMs, which were further hurt by its aggressive launch of GSM services. In a bid to woo customers, the company went out offering very attractive schemes, including free talk time. All these efforts had an adverse impact on the company's financials. During 1HFY10, revenues of its wireless business dropped by about 8% YoY. This segment forms around 60% of the company's revenues. The other key reason was of it being under the scanner of the Department of Telecommunication (DOT). The reason cited for the same is alleged under-reporting of revenues for FY07 and FY08.

    Data Source: CMIE Prowess, BSE

    Hindustan Unilever (Returns in - 2008: 17%, 2009: 6%)
    After a stellar performance in 2008 when Hindustan Unilever Limited (HUL) was one of the best performing stocks, the company disappointed investors in 2009. With gains of merely 6% YoY during the year, the company was one of the Sensex underperformers. The reason for this is not far to find. The company seems to have misjudged the preference of its consumers and ended up with the wrong strategy during the year. With rising raw material costs, the company increased the price of its products while shifting it's focused to premium products which were perceived to be recession proof. However, consumers in an effort to find value offerings either switched brands or down traded. This benefited HUL's competitors, who by taking a hit on margins after absorbing higher costs were able to gain market share. The result was HUL losing its customers and facing the daunting task of regaining its lost market share.

    Data Source: CMIE Prowess, BSE

    NTPC (Returns in - 2008: -28%, 2009: 30%)
    A 30% gain in a year is not bad. But when you compare it with peers and also the broader markets that gained about 81%, this seems petty. NTPC's stock has in fact not gone anywhere in the past two years. And investors must be ruing the lost opportunity. This is especially considering that all this while the company has been talking aloud of its mega growth plans. But not much seems to have fructified. Issues related to fuel - both coal and gas - continued to impact the company's growth plans in 2009. The same is likely to continue into 2010 as well. Further, the stock is already trading at fair valuations. This is not likely to make matters any good for investors.

    Data Source: CMIE Prowess, BSE

    DLF (Returns in - 2008: -74%, 2009: 28%)
    DLF continued to be in the rough patch during the early part of this year. The reasons for the same were various - tightening of liquidity, lower realisations, and lower demand. In addition, it had a lot of sorting out to do internally as well. The main issue was the huge debt on its books, which has increased by nearly one-third during FY09. However, the company decided to pull up its socks and restructure its books. In a bid to reduce the debt, it decided to sell its non-core assets. But these efforts seem to be going a bit slow as high interest costs have impacted the company's financials. However, the fact that the company was looking to restructure its books went down well with the investing community. This led to an almost 160% surge in the company's stock price from its lows in March this year. But as compared to the other index heavyweights and its peer group companies, DLF's stock performance over the last year has not been up to the mark.

    Data Source: CMIE Prowess, BSE

    Sun Pharmaceuticals (Returns in - 2008: -13%, 2009: 42%)
    Despite registering gains of 42% during 2009, Sun Pharma still managed to be part of the top 5 underperforming stocks of 2009. This underperformance could chiefly be attributed to the problems that its 76% subsidiary Caraco faced in the US. The USFDA found Caraco's manufacturing facility in Detroit to be non-compliant with good manufacturing practices and had seized certain drugs from this plant. This seriously impacted Caraco's business which in turn had a negative impact on Sun Pharma's performance as well. While efforts to resolve the problem are on, the timeline with respect to the same is anybody's guess as the Ranbaxy issue has shown. Barring the US, however, other businesses of Sun have been doing well and the company still enjoys among the best margins and return ratios in the pharma sector.

    Data Source: CMIE Prowess, BSE



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