Tech-centred action

Sanjiv Shankaran

IN THE Business Line study on the degree of association between the badla turnover and the stock price, the scrips covered could be loosely classified thus: The technology stocks -- covering both bluechips and second-rung stocks such as Infosys Technologies, Satyam Computers, Himachal Futuristic Communications, Global Tele-Systems, Wipro and Zee Telefilms.

The technology group was covered most extensively, as that is where all the `action' took place.

The second group of stocks recorded a sudden surge of interest on the heels of a significant development. Stocks such as ICICI, Larsen & Toubro, Ranbaxy and ACC fall in this category.

The third group is the residual stocks in the sample of 15 -- Reliance Industries, Gujarat Gas, Cipla, HDFC and State Bank of India.

Each group showed different and interesting patterns, and there were striking differences within each group too. A look at the variations:

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Technology stocks: Technology stocks dominated the rally last year, with a staggering rise in prices. For instance, in Zee Telefilms, the rise at the beginning of the rally between January and May 1999 was three-fold. The Himachal Futuristic stock rose ten-fold during the phase when the bull run peaked -- November 1999 to March 2000.

The sudden importance of the sector may be gauged by the fact that stocks such as Wipro, Global Telesystems and Himachal Futuristic were brought into the Specified Group -- comprising scrips that come up for badla trading -- only towards the end of 1999.

As a consequence, the correlation between the stocks that came in late and those that were there from the beginning -- such as Infosys, Satyam and Zee -- are strictly not comparable.

By the time the last batch of stocks was brought in, the market was already in a frenzy, a factor reflected in the badla turnover. Yet, when one compares the correlation in Infosys to other technology stocks during the phase when the bull market peaked, the difference is startling.

Infosys, widely believed to be the bluest of the bluechips, did not get as much attention of the badla traders as the second-rung stocks did. Compared to the correlation in Himachal Futuristic and Global Tele, that in Infosys was weak.

Any explanation for that would, at best, be a guess. But one explanation that may be of interest to investors is that in Himachal Futuristic, Global Tele and Zee, a big operator was believed to extremely bullish on them.

It is perhaps a reflection of the way the system operates that the stocks where a powerful broker was believed to be interested were most popular, though their fundamentals may not have been remarkable. The market often works on the principle that the one who gains the most is the one who wants what everybody else wants. Almost everybody seemed to want technology stocks.

Stocks that witnessed developments: Ranbaxy tops this category. Last year, the company achieved a breakthrough when it concluded a watershed drug research deal with Bayer AG. But almost everyone seemed to know of the deal a long time before it was announced.

The outcome was the highest degree of association between badla turnover and stock price among the sample. Ranbaxy is interesting because a cursory glance at the stock's badla turnover and stocks price during the period under study shows a clear build-up in the period approaching the deal, followed by a decline in interest.

This is one stock where the badla trading pattern proved to be a near-perfect indicator of investor interest and the future price.

Larsen and Toubro's story was similar, except for a small difference -- the big development never took place! In 1999, when the mantra was to spin off businesses not core to the company, L&T was to have span off the highly lucrative software division. That, in turn, was expected to give a big return to L&T shareholders.

As the story did the rounds, everybody's interest in the stock rose, a factor reflected by the relatively strong association between the badla turnover and the stock price between April and December 1999. Finally, the big story turned out be just that, a story. L&T remains in the same form, and the stock price is back to lower levels.

ICICI and ACC came up with further issues of equity shares last year, a development that triggered interest in the stocks. ICICI's case was perhaps more interesting. At the beginning of 1999, the stock was beaten down by speculation about the extent of ICICI's bad loans.

Then came the public issue in India and the American issue. ICICI moved into a different orbit. Interestingly, a sharp increase in interest came along with the big boom in technology stocks. ICICI was touted as a technology-savvy company that would benefit from the fruits of rapid progress in IT.

The others: Among the other companies, HDFC and Reliance were two old favourites that recorded a big increase in stock price. While the stocks gained from the general uptrend, they showed greater resilience during the fall after the Union Budget. HDFC actually continued to post steady returns.

In spite of the considerable returns the stocks have displayed, the interest among badla participants was certainly significantly lower than that in technology stocks.

The trend in HDFC and Reliance suggests a couple of things. The lower interest is understandable when one considers the much higher returns that come from stocks such as Himachal Futuristic. But what does the continued interest in stocks such as Himachal Futuristic signify? Will these stocks still give the highest returns, or is the badla market trapped in the past?