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Special Report

Published on: Feb. 22, 2021, 10:39 a.m.
Markets are off the main highway
  • Illustration: Panju Ganguli

By Daksesh Parikh. Executive Editor, Business India

Not so long ago, people travelling by car often used to stop at regular intervals to cool their car engines, with many pouring water to cool the same before resuming their onward journey. Market conditions are currently somewhat similar. After rising by nearly 12000 points in 91 sessions, virtually without any correction, logic demands that it takes a pause. Profit taking and portfolio churning have been the new norms. Last fortnight, markets exhibited this trend. After decisively crossing the 52000-peak going upto 52700, it slid back to 50889 on Friday, 19 February.

This correction was appreciated by veteran investors. “A one-sided upward movement for long, could mean a very steep correction later,” says Jyotivardan Jaipuria, founder and MD, Valentis Advisors, a Mumbai-based PMS and advisory firm. Jaipuria who has nearly three decades of experience in the stock market points out: “No one is doubting the direction of the bull run but the small corrections are useful.”

Markets have been in a particularly jubilant mood ever since the budget was announced. Post the budget, relief gave way to aggressive buying and the Sensex, crossed 50000 on 3 February, 51000 in another three sessions and 52000 in four days. “We have seen a wide level of participation from investors. Many have taken to direct investments in the markets,” says A Balasubramanian, who points out that “government is talking and actioning”. Post the proposals the government has already started taking actions towards implementing them. “It is serious in its intent of restructuring the PSUs and genuinely seeking to create value.” Balasubramanian is unconcerned about the small corrections. Investors feel that the growth in the economy will be smooth and more orderly, going forward. EPS growth will follow. In the case of large companies, he is of the opinion that they are in a consolidation stage. 

Like in any bull run, FPIs always prefer to go after large caps and individual investors follow even as the domestic institutions go on a selling spree. However, later in the bull run cycle, it is the midcap and thereafter small caps which come into focus for individual investors. This bull run in no different. While the Sensex since 18 February, 2020 has gone up by 24 per cent (till 19 February, 2021), the broader market encapsulated in the BSE500 has seen a 28 per cent rise. A 30 per cent rise in midcaps and 37 per cent rise in small caps largely contributed to this. 

No one is, however, talking of a directional change despite the current correction. There is a general consensus that individuals also have a lot of funds at their disposal. Earlier, during the lockdown the fear factor made them wary of spending on unnecessary items as a result of which overall savings improved. And equity still offers the best investment opportunity as property as a class for general investors is not feasible and gold seems to be plateauing. However, of late, a section of financial advisors has been urging its HNI clients to book profit, park their money elsewhere, and re-enter later. 

  • Balasubramanian: government is talking and actioning

    Balasubramanian: government is talking and actioning

Marzban Irani, CIO Debt, LIC Mutual Fund, says: “To an extent some HNIs have been taking money out from equity and equity mutual funds. But this would probably go to AIF or PMS again. Yields are quite low in debt as of now, compared to what they were a year ago. Irani adds that: “FIIs are also not enthused to put money in debt despite the relatively high interest rates compared to those in the US or Japan. One of the reasons for this is also the currency risk with the regulators stepping in to stem volatile movement.” Irani feels that many HNI investors prefer taking exposure to direct debt, putting money in bonds and corporate issues.

Rajeev Radhakrishnan, fund manager and Head Fixed Income, SBI MF concurs that “the inflows across the last month or so have been pretty stable, like they were over the last one year,” adding that “there is no active asset allocation between debt and equity except in some cases where money is put into very short and liquid funds to allow large investors to get back post correction”.

It is true there are other reasons that have rattled investors. One is the fear of hardening yields in the US market and the other is the firming up of crude prices. The third is overheating.  Prices per barrel of crude have risen to over $60 and while the jury is still out on whether the prices will be sustained, some HNI investors feel it is better to book profit before the markets correct themselves. FIIs, in fact, pumped in around Rs23,874 crore in February and remained net buyers even when market was in a corrective phase. This could probably mean that they are buying more in non-index shares or paring their gains in mainline index shares. DIIs have been net sellers of Rs16,600 crore in February. 

  • Jaipuria: small corrections are useful

    Jaipuria: small corrections are useful

This also explains why the broader market index of BSE 500, which accounts for 90 per cent of the total market cap of all listed companies on the BSE, has outpaced the Sensex over the last one year. Even PSU shares are being rerated afresh on talks of disinvestments. In the first phase the government is looking at BPCL, SCI and Concor amongst the listed companies and Air India amongst the unlisted ones. BPCL has, since 1 February, gone up from Rs383 on 29 January, the day before the budget, to Rs430 on 19 February.

The second largest PSU refinery, a section of investors feels that the marketcap of Rs93,000 crore is still far lower than the intrinsic value placed at Rs1.50 lakh on a replacement basis. Shipping Corporation of India reached an all-time high of Rs103. The price to book value, at this rate, works out to 0.58x. Container Corporation share prices have gone up from Rs433 to Rs569 during this same period. The PSU index rose by 22 per cent in just 15 days. 

Besides PSU shares there are many shares of companies which have given abnormally high returns. While it may be true that some of the lesser known companies of doubtful parentage may also have gone up, there are several companies which have moved up due to genuine reasons. The reason they do not appear on the radar of large investors is because in most cases smart investors – and quite rightly too – look at the exit options before getting in small cap stocks. The thin volumes in midcaps and small caps are a strict no-no for large investors who also shun volatility.

Nevertheless, there are many good PMS managers as well as mutual funds which specialise in these shares which, in a way, fit the bill of high risk, high returns. Some of these stocks have been identified by us. But these are only a handful of the several of the relatively under-researched stocks.

  • Radhakrishnan: inflows have been stable

    Radhakrishnan: inflows have been stable

The outliers: high risk, high returns in a bull market

The multi baggers in the broader markets have outpaced returns from mainline index stocks

In a bull market everything sells, as the popular saying goes. However, while most shares do go up in a rising market there are quite a few which move up due to company specific reasons or some factors in the global market which may have an impact on Indian companies. And one is talking not just of cyclicals. Some shares which have moved up are mentioned below. The list, as mentioned before, is by no means exhaustive but for want of space only some are highlighted. 

In the case of Linde India (earlier British Oxygen) shares saw a jump from Rs900 on 29 January to Rs1,477 on 18 February on news that the company had sold off the land of its packaged gases plant factory in Diamond harbour which was shut down for Rs300 crore. In 2019, the company sold off its South Region Divestment Business Division on a slump sale basis for Rs1,380 crore, this translating into an exceptional profit of Rs780 crore.

The company had another division earmarked for divestment at Bellary, in line with the conditions for the takeover of Praxair in India. Currently it has a 50 per cent stake and is a joint venture. The management, which has 75 per cent, had not received any worthwhile response to its offer for buyback last year. It has now called a meeting on 1 March, 2021 to review the results and possibly a dividend. 

In the case of Hemisphere Properties, a company spun off from Tata Communications (earlier VSNL) and housing land parcels of 739 acres in Pune, Chennai, New Delhi and Kolkata, there has been considerable interest in the company which was listed earlier in FY21.  The value of the land can be gauged from the fact that the transfer duty payable for the transfer of land from Tata Communications to the Central Government-owned company worked out to Rs651 crore. If one were to assume stamp duty ranging between 12-15 per cent, the total value of the land will be at least around Rs3,600 crore. The Central Government holds 51 per cent of the total 28 crore shares. One can work out details of the per share holding. Monetisation of land will happen sooner rather than later.

  • Irani: FIIs are not enthused to put money in debt

    Irani: FIIs are not enthused to put money in debt

Pharma companies, outside the big ones, also saw investors’ interest sparked off by some corporate action. Laurus Labs, a Hyderabad-based company, is one of the largest producers of anti-HIV and Hepatitis C bulk drugs besides generics APIs and formulations. The company’s shares, which were around Rs84 last February, have gone up by more than 4x to reach Rs372 on 17 February.

It has a market cap of close to Rs20,000 crore. The company was rerated after it acquired a 72 per cent stake in a Bangalore based biotech tech, Richcore Lifesciences for nearly Rs250 crore. The company, which is a contract manufacturing company making enzymes and proteins used in food products, will allow Laurus to build a new income stream into biotech. 

Another Hyderabad-based 37-year-old company, Neuland Labs, which is also an API manufacturer with a market cap of Rs2,000 crore saw its share price go up by nearly 5x to Rs2,145 over a one-year period beginning 18 February 2020. From Rs442 the share price in February 2020 had dipped to a low of Rs247 on 13 March and a high of Rs2,350 on 18 February, 2021.

Many of the stocks which were often cast as old economy shares came into fore in recent months. In the case of speciality chemicals, the sharp rise in global prices saw shares of Dharamshi Morarjee rise from Rs98 in February 2020 to over Rs300 in February 2021. DCW's rise was smaller, from Rs15-16 to Rs20. 

Sunil Singhania, explains that: “2021 is going to be a stock-specific market. Investors who feel the large caps have become expensive and out of reach have months ago turned to smaller companies in the broader market where an equal amount of investment would see higher growth than investing in mainline index stocks. Not many mutual funds hold small cap stocks which are considered high risk and where exit of a large number of shares may not be possible in times of sharp corrections.”

“This is also one reason why retail investors have preferred to invest directly in the markets, in many cases withdrawing money from equity funds,” says Jyotivardan Jaipuria.

  • Singhania: investors have turned to smaller companies

    Singhania: investors have turned to smaller companies

In metals, several companies saw a smart rise. Hindustan Copper, a mini Navratna company where the government holds 76 per cent, and was trading at around Rs29 per share a year ago went upto Rs91 on 19 February, 3x in exactly a year’s time. Copper prices in the world market have firmed up considerably in the face of surging demand post Covid. 

This is expected to remain firm and according to Goldman Sachs likely to break all-time highs by 2022, moving upto $9,500 per tonne from the existing $8,650 per tonne in the spot market on LME in February 2021 as against $5,700 per tonne in February 2020. The company has posted Rs150 crore for the nine months ended December as against a Rs570 crore loss posted in FY21. It was for the first time in the last decade that the company posted a loss. 

The other metal company besides the main line steel and aluminium companies which attracted investors’ attention, was Indian Metal Ferro Alloys Ltd. From Rs206 in February 2020 it rose to just a rupee below 500 on 8 February. This integrated producer of ferro alloys used largely in steel, saw a surge in demand as also in prices. It benefitted from problems in two exporting countries viz Inner Mongolia and South Africa.

As a result, while the topline in December did not show much change, the profit rose to Rs100 crore as against a profit of just over Rs18 crore. Fears of an imposition of export taxes in South Africa and production problems in Mongolia have led to a surge in prices. For the nine months, the total EPS was Rs23.63 as against the loss of Rs4.24 in FY21.

  • None

India Cements had started rising ahead of the pandemic on news of Radhakishan Damani, better known as the promoter of DMart, and his associates acquiring a stake in the company. Shares had gone up from Rs88 in February to Rs169 – almost 2x in a year. Better prospects of a revival in the demand for housing have seen most cement stocks hit a 52-week high.

UltraTech had risen from Rs4,472 last February to Rs6,586 on 10 February. Shree Cement, the second largest company by market cap, rose by Rs5,500 to a high of Rs29,097 on 16 February.  The point is that while the larger companies made huge gains in absolute terms, percentage wise, it is the smaller companies which gave better returns to investors. 

Small companies are also nimbler than larger ones.  Ganesha Ecosphere (market cap Rs600 crore) is but one such example. The company, originally named Ganesh Polytex, was incorporated in Kanpur in 1987 for the dyeing of polyester filament yarn. It started operations in 1989-90. In 1995, it started as a small recycler of PET bottles and over the last 25 years has become one of the largest PET recyclers (after Reliance Industries, of course). It currently has a capacity of 57.600 mtpa across two of its units, one at Kanpur and the other at Rudraprayag in UP.

The share price of the company had risen from Rs377 to Rs592 in the course of one year. With the focus of ESG now actually taking shape, many large investors have a stake in the company. SBI MF and DSP MF are the two largest non-promoter holders in the company holding 8.65 and 6.07 per cent respectively as per the shareholding on 31 December, 2020. The promoters have also increased their shareholdings from 40-42 per cent over the last three quarters.

  • None

It is not only small companies that give eye-popping returns. Several large companies which had gone out of favour with investors for one reason or another have also given very good returns in this bull run. Tata Power, which was traded at Rs44 a year back is now traded at more than twice the returns. It had reached a high of Rs93 on 19 February, 2021.

Besides power the company has also got into setting up data centres – one of the upcoming industries. Adani Power has also done it. For both groups this makes sense as data centres are huge guzzlers of power and this is a good diversification for power companies.

Bajaj Electrical has gone up from Rs404 to cross over Rs1,000, Tata Consumer, which took over the food business from Tata Chemicals (one of its original promoters when the company was then known as Tata Finlay) has seen its share prices move up from Rs355 in February 2020 to Rs623 in February 2021. CG Power and Industrial, once regarded as a blue-chip company, saw its prices move up from Rs8.27 in February 2020 to Rs52 currently. The change of hand to the Murugappa group from the Thapar group has led to a rerating of the stock.

As said earlier, there are plenty of stocks which have good potential. However, in a bull run where anything and everything goes and everyone and his uncle has a tip to offer, the utmost caution has to be exercised. Otherwise one can easily get trapped into holding huge chunks in a company whose name may again start doing the rounds in the next bull run when some other operator is out looking for more suckers.

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