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Market Momentum

Some financial and FMCG stocks saw new highs in the rally

Herd mentality is a common term in the investment world to describe when most of the investors flock together in a single direction, be it bulls or bears. The direction is clear at this moment in time, with the current bull rally covering most positions, although the most popular market indicator, Sensex, is still short of its January, 2008 peak of 20,827 points, by around 25 per cent and it is expected to stay near that, as the market has hovered around the current levels for more than a month now.

However, it was not really surprising to see that out of all the Bombay Stock Exchange (BSE) 500 stocks there were 13 that touched new peaks during the rally that started from March 9, 2009 till August 14, 2009. These stocks dominantly belonged to two sectors: FMCG and financials. Among the financial companies three banks are at the forefront — Punjab National Bank (PNB), Union Bank of India and Dhanalakshami Bank. LIC Housing Finance is the only financial company in the list that is not a bank.

We take a look at the company-specific activities that led to the jump in stock prices.

Rising Ratioanle

LIC HF sells housing loans to individuals and corporates. India’s largest insurer, the Life Insurance Corporation of India (LIC), is its promoter. Even during the downturn, while other companies were finding it tough to plug their products, LIC HF saw its business grow. The company’s capital adequacy ratio (CAR) dropped from 15 per cent to 13.5 per cent (mandatory CAR is 12 per cent). It has moved aggressively to raise capital through all means, recently selling 44 per cent of its holdings in LIC Asset Management Company (AMC). It further dumped 55 per cent of its holdings in the LIC Mutual Fund Trustee Company. Its board also approved raising cash through qualified institutional placement (QIP). The hectic activity has powered tangible results on markets too. The previous high registered by its stock was on December 11, 2007 at Rs 403, but during the bull rally it reached another peak at Rs 682 as on July 6, 2009.

PNB is considered to be among the strongest public sector banks in India, with its net profit making a habit of chalking up substantial gains on a year-on-year (YoY) basis. The bank has managed to maintain its momentum due to its strong presence in the rural sector in northern India as compared to its peers. The company’s new high is higher by 4.3 per cent from its previous peak.

Aside from banking, the other dominant group is FMCG, a sector considered to be defensive. The stock of Colgate-Palmolive reached new highs even before Q1, 2010 results were declared. Its share price maintained the levels of Rs 630-650 for a few days after the results were announced, but then it took a southward turn. Its net sales increased by 19 per cent on a year-on-year basis. While its net profit increased by 43 per cent YoY.
Another FMCG giant, ITC saw its share price hit a new peak after its quarterly results were declared. Its net sales rose by 6 mere per cent, compared to that its net profit increased by 17 per cent. Cigarettes’ business posted a strong revenue growth of 14 per cent driven by high volumes.

Marico’s stock started gaining on the news of its being listed in Bangladesh. On announcement that it will be declaring results on July 23, 2009 the company’s share price started climbing up and hit the roof on the day of the announcement, registering a new peak at Rs 91.50.

The demand for the stock of Godrej Consumer Products ltd. (CGPL) rose on the back of the expectations of good quarterly results. The company had been able to give stiff competition to its biggest rivals and snatch market space. Its quarterly report didn’t disappoint as net profit grew by nearly 75 per cent YoY, though it was not much on a quarter-on-quarter (QoQ) basis — 7.4 per cent.

With some reports claiming the possibility of Sara Lee exiting the 51:49 joint venture with Godrej in the near future, the stock price reached a higher level all together, as an exit would result in Sara Lee having to pay GPCL the value of the licensed brands of Brylcreem, Ambipur and Kiwi. This led to the unlocking of the value of the company’s share price. A unique aspect of the company was that its previous all-time high was not during the biggest-rally-of-them-all between December 2007- Jan 2008, but was reached even before that on April 4, 2006, at Rs 196.

Hindustan Oil Exploration Co. Ltd.(HOEC)is in the business of exploration and production of oil and natural gas. This company saw its share price rising steadily, and has now shot up vertically. Two possible reasons can be ascribed to this. One of them is that it recently got some good news from its PY-03 oil field. The second stems from reports that indicate the company’s main hydrocarbon field, PY-1, is close to producing gas. Sources among potential buyers of the gas from the field say they expect production to begin not later than end-September, which is just around the corner — the field has been under development for over 15 years now.

Castrol India Ltd.(CIL) has reported a stellar performance for the quarter ended June, 2009. Although the company’s stock price had started marching before the results came in. Better auto sales that sent demand upwards led investors to accumulate the stock. Also, there was a correction in raw material cost, which was visible as early as Q2CY09. This will enable operating margins to sustain in the range of 22-24 per cent. Adding to the stock’s lure is that the company has strong brand power, it’s debt free, distinctly superior products/delivery and improving cash flows.

Shares of Gujarat Gas rallied by over 14 per cent to Rs 372 after the company announced it Q2 results (It follows a calendar year accounting method). Its net profit posted a 10 per cent growth YoY. While, net sales increased to Rs 3.32 billion as against Rs 3.06 billion in the same period last year. The board of directors of the company has recommended a bonus issue of equity shares in the ratio of one equity share of the company of Rs2 each for every one equity share held by the equity shareholders of the company.

Exide Industries Ltd.has been powered by the humongous battery demand especially in the auto battery replacement market. Better performance by the industrial segment, especially in the telecom, railway and power segments, works in favour of the company. With increase in auto sales the demand for auto batteries (contributes almost 65 per cent of Exide’s profit) will only grow.

The article has appeared in the September issue of Wealth Insight magazine.