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Godrej Soaps: Will the bubble burst?

Suresh Krishnamurthy

Referring to the divergence between the Nasdaq and Dow Jones indices, it was remarked that the conventional descriptions of bull or bear markets are no longer applicable. Similar trends are visible closer home too.

Since March this year, a noticeably divergent trend has emerged between the narrower indices, the Sensex and Nifty, and the broader indices, the BL-250, BSE National and S&P CNX 500. In fact, the Nifty has outperformed the Sensex in the last one year. So , a description such as a flat market, which may hold good for one index, does not necessarily hold good for the other. Broadly, trends indicate that select stocks and industries have charted their own course. Trading over the past 10 sessions also confo rms to this trend.

The stocks of Glaxo India, Burroughs Wellcome, SmithKline Consumer Healthcare and SmithKline Consumer Pharmaceuticals have been on the rise.

The annual general meeting of Glaxo Wellcome Plc of the UK concluded only days before, giving the formal nod to a merger with SmithKline. SEBI has also exempted the Glaxo-SmithKline combine from coming out with an open offer to transfer its stakes in the Indian affiliates to the merged entity. Further details on how the combination is to be managed in India is awaited.

Meanwhile, the stock of SmithKline Consumer Healthcare has been surging ahead. This is, perhaps, an indication that the markets are anticipating announcements that affect the SmithKline Consumer Healthcare more.

On the formal approvals front, the merger of Dr. Reddy's Laboratories and Cheminor Drugs was also approved by shareholders. With the swap ratio for the merger fixed at 9:20, the scope for arbitrage appears limited given the current stock prices of Dr. Re ddy's and Cheminor.

The consolidation in the NBFC industry, which has been taking place in fits and starts, received a boost with the proposed combination of four companies - Alpic Finance, Apple Credit, Apple Industries and Srei International Finance.

The merger would create one of the larger non-banking finance companies in India with a nation-wide presence and exposures to varied segments, such as equipment leasing and car financing. The markets, however, do not appear to be enthused over the develo pments and the stocks continue to languish.

The treatment meted out to the stock of Godrej Soaps was entirely to the contrary. The stock has gained 8 per cent on two successive days as the company's management unveiled a restructuring plan. The company's consumer products business is to be demerge d with the shareholding pattern similar to that of Godrej Soaps.

Its stake in Godrej Sara Lee, a joint venture, is to be divested to the extent of 25 per cent to the public. The resultant cash inflow is to be used to repay debts, bringing down the debt-equity ratio to half of what it is today. The markets seem to be s uggesting that the restructuring proposed by Godrej Soaps may indeed unlock value. However, it remains to be seen if the share price rise will be sustained.