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A carrot and stick policy

Raghuvir Srinivasan

IT may be in a turmoil but the market is certainly not dishing out irrational valuations. A look at the price movements in the last fortnight shows that the market is adjusting stock valuations in tune with performance by the respective companies. This i s the season for results announcements and the movement in stock prices follows a strict pattern of punishment for underperformance and reward for a good show.

Rerating of select stocks

The first month of results announcements has seen exceptional performances by companies such as ACC, Ashok Leyland, BHEL and Wartsila NSD.

Each of these companies has either bucked the overall trend in their respective industries or have outperformed them. And, the market has been quick to upgrade the valuations of these stocks. Only that in most cases, the market seemed to have an inkling of things to come and the stocks rose even before the results were made public.

Take for instance, ACC. The company, which posted a loss of Rs 58.85 crore in 1999-2000, has staged a smart turnaround, reporting a net profit of Rs 47.48 crore for 2000-01. This, at a time when the industry has been bogged down by sluggish volume growth and stiff competition for market share. The market was quicker than normal in rewarding this good performance. The ACC stock has risen 13 per cent in the last fortnight moving up to Rs 149.80 on Monday, the day when the company announced its results.

Similarly, Ashok Leyland, which bucked the overall trend in the commercial vehicles industry, saw its stock rising in the last fortnight. The company posted a 17 per cent growth in its bottomline which went up to Rs 91.68 crore in spite of a reduced offt ake of its vehicles in 2000-01.

The stock has seen its valuation rise by 25 per cent in the last two weeks moving up to Rs 56.55 on Monday.

There are other similar instances of good performers such as BHEL and VSNL being rewarded. However, one stock that went unrecognised was Wartsila NSD. In spite of a 200 per cent growth in its net profit in the January-March 2001 quarter, the stock has re mained flat at around Rs 71.

On the other hand, there are stocks such as Reliance Industries and MRF which have seen a devaluation in the last fortnight. The MRF stock was marked down by 9 per cent in the last fortnight to the current levels of Rs 708.20. And sure enough, the compan y reported a 75 per cent drop in its net profit to Rs 4.28 crore for the January-March quarter.

Reliance Industries has seen its stock shed 10 per cent in the last fortnight to Rs 343 on Monday. In fact, the stock dropped to as low as Rs 295.85 in this period before recovering to the current levels.

The stock is fancied by speculators and its moves are dictated as much by technical factors as fundamental. But it seems to be more than a coincidence that the fall has been followed by the announcement of a drop in earnings growth by the company in the January-March 2001 quarter. Obviously, some in the market seem to have had prior knowledge of the performance.