Year's gainers and losers

The Smart Investor Team

Averages hide details. A cursory glance at the Sensex would show that it has moved up by four per cent this year.

However, dig deeper and a differential movement across sectors is revealed. Some sectors continued to lose their sheen and continued on their downward spiral while the others have been buoyed by favourable market conditions.

The divestment policy despite hitting some roadblocks during the year and the Securitisation Bill sent stock prices of most public sector companies and banks to all time highs.

In fact, the majority of the companies of the top ten gainers, in terms of market capitalisation, this year are PSU stocks.

The oil PSUs, in particular, have done exceptionally well due to the deregulation of the administered pricing mechanism and the fact two of them are lined up for divestment.

Some auto stocks like Telco, Bajaj Auto and TVS Motors have also done well. Index heavyweights such as Reliance and Hindustan Lever find themselves in the losers list.

The poor monsoons threw a shadow on the growth prospects of HLL and the company lost around 18 per cent in market capitalisation.

The downcycle in the petrochemical industries had an adverse impact on Reliance Industries but the company managed to recoup its losses towards the end of the year as it struck gas in the Krishna Godavari basin.

Its mega rollout of its WLL mobile services across the country also was also cheered by the markets. The much sought after information technology sector rallied on the back of impressive Q2 performance of front-line stocks such as Infosys and Wipro.

The sector outlook brightened as some companies bagged multi-million dollar offshore contracts during the year. As we bid good bye to 2002, it seems like government policies seem to be the single most important factor that drove stock prices higher this year.

The outlook for next year is bright as well. Most fund managers expect the markets to perform better next year.

With return on fixed income avenues declining, they expect money to flow in equities as valuations are attractive here. But that's another story. Do wait for our next issue: Where to put your money in 2003 to find out more.

In this issue, we look at top gainers and losers for the year, amongst companies having market cap of over Rs 500 crore (Rs 5 billion).

The Gainers

Bank of India
Latest closing price: Rs 37.05
Latest market cap: Rs 1,808.34 crore (Rs 18.084 billion)
Sales growth: 5.01 per cent
Net profit growth: 43.17 per cent
EPS: Rs 7.61 (not annualised)
P/E: 2.43

Banking stocks as a whole have witnessed an impressive run on the bourses this year. The main trigger being the passage of securitisation ordinance which is expected to sufficiently empower the banks to recover some of their non-performing assets (NPAs). The banking industry is saddled with as much as Rs 70,900 crore (Rs 709 billion) of gross NPAs.

Bank of India has also gained significantly from the recent rally in banking stocks, with market cap vaulting by 150 per cent this year. The bank has net NPAs of 5.6 per cent of total advances or over Rs 4,000 crore (Rs 40 billion).

The robust operational performance of the bank has also attracted the investors. Despite the fall in its other income, the bank managed to show a 10 per cent growth in revenues for the half year ended September 2002.

This suggests that unlike other its peers, Bank of India did not rely on other income to boost its topline. Moreover, the NPAs have shown a declining trend which indicates an improvement in the credit quality. The banks earnings per share has improved not only because of the improved profit figures but also because it returned capital to the government. The bank is looking towards the film industry as a new source of profits for the bank.

Outlook: Analysts expect the bank to maintain the growth in profitability. The securitisation act is said to benefit the bank. The focus on technology and its thrust towards finding new sources of revenue are expected to sustain the growth in profitability.

With a reasonable credit quality and a good performance in the traditional sources of income, the bank should be able to sustain its performance over the coming years.

Since the banks is trading at a price-earning multiple of 3.25 there is still scope for a price increase.

Bharat Electronics
Latest closing price: Rs 176.1
Latest market cap: Rs 1,413.28 crore (Rs 14.132 billion)
Sales growth: 54.95 per cent
Net profit growth: 101.18 per cent
EPS: Rs 9.14
P/E: 8.8

Bharat Electronics is one of the few companies that have always benefited immensely from tension on borders or threat of conflict with neighbouring countries. That's because it procures around 80 per cent of its business from defence services.

So it wasn't surprising that the scrip was in the limelight as the possibility of an armed conflict loomed large for the better part of this year.

The sentiments at the counter were further boosted with the impressive performance in the first half this fiscal. Net revenues vaulted by 55 per cent to Rs 828.23 crore (Rs 8.282 billion) while the bottomline also bloated by 101.2 per cent to Rs 73.13 crore (Rs 731.3 million). Apart from this, Bharat electronics has entered into an arrangement with its foreign technical collaborators to buyback some of the material produced here. This is expected to give a boost to the growth in exports income.

Outlook: Analysts estimate a growth of 15-20 per cent both in revenues and earnings during this fiscal.

The optimism stems from the fact that the company has built a record order pipeline worth over Rs 4,000 crore (Rs 40 billion).

Even after the appreciation in the share price during the past one year, the scrip trades at a forward price-earnings ratio of around 6 times its FY03 earnings.

Neyveli Lignite Corporation
Latest closing price: Rs 23.1
Latest market cap: Rs 3,875.5 crore (Rs 38.755 billion)
Sales growth: 5.17 per cent
Net profit growth: 4.6 per cent
EPS: Rs 2.16
P/E: 5.35

The state-owned mining and electricity generation major Neyveli Lignite benefited from the strong rally in PSU stocks this year. At the peak of the rally in small cap and PSU stocks, the scrip touched its 52-week high of Rs 37, up from around Rs 10 in January this year.

The scrip, however, has consolidated to a much lower levels of around Rs 23-24 now. In fact, the strong opposition towards the divestment process from within the government has significantly impacted the valuations of most of the PSU stocks.

This apart, the strong resentment from employees has led to postponement of the company's divestment process to next fiscal. Moreover, the markets also reacted negatively on concerns of losses in its fertiliser and briquetting & carbonisation (B&C) divisions.

Outlook: Analysts expect the scrip to remain stable, with limited downside risk from the current level. That's because the company is expected to report robust growth both in revenues and earnings in the near future.

The aggressive expansion in electricity generation business and revision of tariffs from Tamil Nadu electricity Board will driver the company's growth in the next fiscal.

This part, any positive development on the divestment front could trigger some substantial upside movement in the stock.

ONGC
Latest closing price: Rs 349.75
Latest market cap: Rs 49,879.1 crore (Rs 498.791 billion)
Sales growth: 31.24 per cent
Net profit growth: 35.46 per cent
EPS: Rs 29.86
P/E: 5.86

This year turned to out to be pretty good for the oil exploration giant. A whole of positives like the dismantling of oil prices, its move to become an integrated player, bagging marketing rights and striking gas in the Krishna Godavari Basin drove its stock prices soaring.

Now it is looking to acquire stakes in the oil majors up for divestment, HPCL and BPCL to quicken the process of becoming an integrated player. Meanwhile, its 100 per cent subsidiary, ONGC Videsh has already picked up stakes in a couple of oilfields abroad.

It acquired 25 per cent of Sudan's Greater Nile Oil Project at a cost of $756 million with estimated reserve of around 150 million tones, which will provide a steady supply of 3 million tones of oil to ONGC. ONGC is going retail by setting up 600 retail outlets in the areas near its refining capacities.

The effect of administered pricing mechanism are already seen in the company's results. While sales grew around 31 per cent, profits surged 35 per cent higher in the first six months of the fiscal.

Outlook: The company's earnings is likely to move in tandem with movement in global oil prices. But its initiative to become an integrated player will be reduce the earnings volatility.

If it manages to bag one of the oil majors, it will be a huge positive.

The expected deregulation of gas prices will also bode well for the company as gas contributes around 22 per cent of total revenue. In short, it will be a company to watch in the next year as well.

Shipping Corporation
Latest closing price: Rs 68.75
Latest market cap: Rs 1,940.81 crore (Rs 19.408 billion)
Sales growth: -26.98 per cent
Net profit growth: -59.65 per cent
EPS: Rs 2.52
P/E: 13.65

It has been a roller coaster ride for the state-owned Shipping Corporation of India.

The stock has been moving up on the expectations of a sell off. However, given the conflicting statements and frequent changes in the government's stand on divestment have resulted in very high volatility in the stock.

But with divestment process finally moving forward the stock has ended the year on a positive note.

Apart from divestment, the company had very little going in its favour. The freight rates have been falling globally largely due to the recession in economies of developed countries, especially US.

The impact of falling freight rates is clearly visible in the company's financial performance. In fact, the company would have been in the red for the first half of this fiscal but for the extraordinary income of Rs 82.42 crore (Rs 824.2 million). It received a tax refund of Rs 75 crore (Rs 750 million) during the second quarter ended September 2002.

Outlook: With no signs of recovery in the freight rates, analysts expect the financial performance of the company to remain subdued during the next few quarters.

Fundamentally, the valuations already seems to be stretched. But the expected completion of the divestment process could trigger some upside in the stock.

The Losers
Dabur India Limited
Latest closing price: Rs 43.9
Latest market cap: Rs 1,253.78 crore (Rs 12.537 billion)
Sales growth: 4.17 per cent
Net profit growth: 25.67 per cent
EPS: Rs 1.46
P/E: 14.99

It turned out to be a painful year for shareholders of Dabur India. The stock lost 35 per cent in the current year. The investor sentiments were seriously dented due to the spat between the promoters the management which led to the resignation of Ninu Khanna, the chief operating officer for the past four years.

Apart from this, thanks to the inventory correction exercise undertaken by the company, net sales showed a decline trend for the first few quarters. All this impacted confidence level among investors.

Moreover, the poor monsoons have also kept the investors away from FMCG companies. These issues combined with increase in competition, especially in Hair oil and Chyawanprash, lead to the fall of the shares.

On the brighter side, Dabur has separated the pharmaceutical segment to enable it to provide a better focus on various products

Outlook: After the completion of inventory correction, the company is expected to perform better this year. The company's pharmaceuticals business is also estimated to show robust growth adding to the overall performance of the company.

Besides, with the resolution of problems between the promoters and management, the sentiments towards the stock could improve in the coming months. But the scrip will only be rerated once the investors are reassured on the sustainability of the growth in profits.

HCL Technologies
Latest closing price: Rs 187.25
Latest market cap: Rs 5,396.55 crore (Rs 53.965 billion)
Sales growth: -3.2 per cent
Net profit growth: -13.52 per cent
EPS: Rs 6.67
P/E: 14.05

Hit by the marked slowdown in technology spending which traditionally generated bulk of its revenues, HCL Technologies have been aggressively focusing on inorganic growth in the past few quarters.

Including the recent joint venture with Jones Apparels, it totals to eight in all. But all these acquisitions, alliances or joint ventures have failed to enthuse the markets.

And rightly so, as the additional expenses related to acquisitions and integration of newly acquired entities have only led to deterioration of the company's operational metrics.

Operational margins have continuously declined in the past four quarters to as low as 23 per cent for the quarter ended September 2002.

The company has also been unable to control the accounts receivable days and cash flow has been negative for the past few quarters.

This apart, thanks to the inorganic growth strategy, the balance sheet shows goodwill to the tune of Rs 218 crore (Rs 2.18 billion) which will eventually have to be written off.

Outlook: Analysts feel that the scrip will continue to remain muted unless there is a distinct improvement in its core technology business and new entities show significant ramp up in their operations.

But on the brighter side, many analysts seems to be optimist about the long-term benefits of the company's strategy.

Apart from this, the scrip could see some upside as the cost control initiatives enable the company to improve its margins over the next few quarters.

Himachal Futuristic
Latest closing price: Rs 38.65
Latest market cap: Rs 514.9 crore (Rs 5.149 billion)
Sales growth: 2.39 per cent
Net profit growth: -41.54 per cent
EPS: Rs 1.16
P/E: 33.4

The telecom equipment major Himachal Futuristic Communications was one of the worst performers in 2002.

And not surprisingly so, the company was being probed by various agencies for its involvement in the stock market scam.

It's deteriorating financial performance also added to the weak sentiments at the counter. Thanks to the investments in unrelated business, the company is saddled with huge debt on its books.

This apart, the core business of telecom equipment has also been under pressure due to the sharp reduction in import duties earlier this year. This has suddenly intensified the competition for the company.

However, there were some upward spikes in the stock that were largely driven by speculative buying by operators.

The stock price also moved up as to touch Rs 55 levels in September this year, as the company was able to raise $50 million through a GDR issue.

Outlook: The scrip is executed to remain muted in the near future. That's because the company is still coping up with its poor investment decision and the core business continues to be under pressure.

Analysts feel that the company will find it quite difficult to attract retail investors as many have already brunt their fingers in the stock.

Moser Baer
Latest closing price: Rs 155.45
Latest market cap: Rs 752.53 crore (Rs 7.525 billion)
Sales growth: 30.92 per cent
Net profit growth: 8.97 crore (Rs 89.7 million)
EPS: Rs 22.4
P/E: 3.47

After touching a new 52-week high of around Rs 350 in February, Moser Baer slipped down to as low as Rs 140 level by November this year.

The disappointing results for the fourth quarter of ended March 2002 prompted the selling pressure on the counter. Although the company was able to maintain the growth momentum in its topline, the steep fall in its profitability surprised the markets.

Moser Baer's operating margins fell by 900 basis points to 44 per cent primarily on account of falling realisations in their main product categories of CD-Rs and CD-RWs.

The CD-R prices have been on a downward spiral for past few quarters now. Consequently, the company had to revise its projected earnings growth guidance downwards by 10 per cent for this fiscal.

Even the much-awaited expansion of its manufacturing facilities are believed to be delayed due to the tough market conditions.

Outlook: With the prices of CD-Rs and other optical storage products expected to stabilise at the current levels, analysts expect the growth in revenues to be largely driven by volumes.

Thus, the scrip should at least recover a little once the new manufacturing plant is commissioned in the coming quarters. This apart, any upside in the prices of CD-Rs will act as a trigger for the stock.

VSNL
Latest closing price: Rs 102.45
Latest market cap: Rs 2,919.83 crore (Rs 29.198 billion)
Sales growth: -16.10 per cent
Net profit growth: -28.17 per cent
EPS: Rs 17.92
P/E: 2.86

It was the conclusion of the much-delayed divestment process that marked the beginning of this year for VSNL. With the professional management in the controlling seat before the end of VSNL's monopoly, the excitement was quite palpable among investors.

But the price war unleashed by new entrants coupled with steep decline in international long distance telephony services spoilt the party for VSNL.

Even the state-owned MTNL and BSNL (that control large chunk of ILD traffic) fiercely negotiated for rates comparable with those offered by the new private players.

The spat with MTNL and BSNL dragged on for almost six months and finally had to be resolved by government intervention. Consequently, VSNL scrip touched a new low of Rs 89 by November.

The impact of falling tariff and intensified competition is clearly visible in VSNL's financial performance also. For the first half, VSNL's revenue plummeted 16 per cent to Rs 2,620.9 crore (Rs 26.209 billion) and net profits dipped 28.2 per cent to Rs 510 crore (Rs 5.10 billion).

Outlook: Notwithstanding the recently signed revenue sharing agreement with MTNL and BSNL, the declining trend in VSNL's financial performance is expected to continue over the next few quarters.

The competition will only intensify further with the launch of Reliance Infocomm services. It could trigger another round of price undercutting in ILD services. Thus, it's not surprising that most of the analyst have a bearish view on the stock.

2002: The Year That Was

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