Mixed trend in key sectors

B. Krishnakumar

THE sustained rise in automobile output during 1999 infused some life into auto and auto-ancillary stocks.

But in 2000, the output tapered, and the commercial vehicles, tractors and passenger car segments saw a sharp slowdown over the year. As a result, the share prices quite a few auto and auto ancillary companies declined sharply in 2000.

Ashok Leyland, for instance, posted a decline of about 65 per cent, while Tata Engineering (Telco) saw a 60 per cent drop in its share price. Tractor majors Punjab Tractor and Mahindra and Mahindra also suffered a similar fate on account of the decline in tractor production.

With the automobile sector passing through a rough patch, it is not surprising to find the list of losers populated by auto-ancillary stocks, such as Sundram Fasteners, Sundaram Clayton and India Nippon; and tyre producers, such as MRF, Apollo Tyres and Goodyear.

Investors could stay away from an exposure to the auto sector for the time being, as revival is still not in sight. A pick-up in commercial vehicles output could be used to take exposures in fundamentally sound auto ancillary companies such as Sundram Fasteners, MRF or Goodyear.

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Bitter dose for pharma stocks: With the stock market passing through a bearish phase, the pharma sector, too, did not go unscathed. During the earlier bearish phase of 1998,the stock market displayed a liking for pharma stocks, touted as defensive bets. The expectation that the Patent Bill would be cleared also drew positive sentiment towards pharma stocks in 1998.

However, the relatively lacklustre financial performance reported subsequently by the pharma majors led to large-scale profit-booking in pharma stocks. As a result, these stocks were not fancied during the present bearish phase. The share prices of top pharma companies, such as Glaxo India, Rhone Poulenc, Dr. Reddy's Laboratories, Fulford India and Cipla, saw sharp declines in their share prices over the year.

Mixed bag for FMCG stocks: There was a mixed trend in FMCG stocks. While Hindustan Lever, Henkel SPIC, Dabur India and Procter & Gamble posted modest decline in their share price, Cadbury India, Nestle India and ITC found themselves in the winners list. Of the lot, Hindustan Lever, Henkel SPIC and ITC are strong, long-term investment candidates. Price weakness in these stocks could be used to take exposures in these companies.

Not devoid of winners: Though 2000 could be termed a bearish year for the stock market, the market was not devoid of gainers. The Tables give the list of major gainers of the year. The list is topped by companies without any track record and with shaky fundamentals. The list includes, India Online. Sahara Media, Frilton Engineering and Badal Exports, to name a few.

Lower down the winners list, there were a few fundamentally sound companies, such as Sterlite Industries, Great Eastern Shipping, Bank of Madura and ICICI Bank. However, the sharp rise in these stocks is explained by company-specific developments, and not by inherent fundamental strength.

Both Sterlite and Great Eastern Shipping restructured their operations through the demerger of existing business units. In Gesco Corporation (the real estate arm of Great Eastern Shipping), the battle for ownership and the subsequent spate of open offers fuelled a rally. The decision to merge Bank of Madura with ICICI Bank has provided the trigger for a rally in these stocks. Both the scrips posted returns in excess of 50 per cent during 2000.

Broadly, the gainers list is dominated by companies that were either takeover targets or which undertook restructuring. Quite a few stocks moved up on the back of company-specific developments. Raymond, Indian Aluminium, Hinduja Finance and Astra IDL fit into this category.

In contrast, both HDFC and HDFC Bank logged significant gains during 2000, on the back of fundamental strength and not by any specific event or development. Taking into account the strong fundamentals, management quality and prominent presence in their area of operations, investors may stay with these two stocks.

Lower down the gainers list, a few quality companies appear to have moved up solely on the back of underlying fundamental strength. These include ITC, ITC Bhadrachalam, Reliance Industries and Gujarat Gas; and paint companies such as Asian Paints, Jenson and Nicholson and Berger Paints. Superior performance posted by these companies, even in a dwindling business environment, appears to have attracted market attention towards them. Shareholders can remain invested and book profits on a price uptrend in these stocks.

ITC, Nestle and Cadbury also ended the year on a positive note. The decline in the price of cocoa, the key input for manufacture of chocolates, appears to have pushed up the share price of Cadbury and to an extent Nestle. The steady improvement in volume growth could evoke positive sentiment towards ITC. Shareholders of these stocks could look for opportunities to book profit. Given the recent run-up in prices, and the relatively lacklustre near-term prospects, fresh purchases may be deferred in these stocks.