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Irrational Advances

These companies have surprised everyone with their huge market gains

In the absence of any positive new triggers, a number of companies, across various sectors of the economy, have emerged as the highest gainers on the bourses which, by standard reckoning, should really not have been the case. Market sentiment has driven indices up — from March 09 to April 29, 2009, Sensex gained 39.74 per cent.

In the short-run, investors’ sentiments do tend to become one of the strong drivers of stock markets, even though at times these sentiments could be totally irrational. As such, even if there is no major change in a company’s fundamentals, a positive attitude can still guide the company’s share price to new heights. These sentiments are built, and acquire momentum, on the basis of day to day news available to investors, no matter how nebulous its nature. Investors’ reaction then guides the performance of certain stocks to some astonishing results.

For instance, in the current market rally, BSE Realty index with 63.42 per cent topped among all sectoral indices, in spite of the fact that there has been no tangible improvement in performance by companies in this sector. It was also the worst-performing index in 2008 with 82 per cent fall.

It is a clear indication that stocks that log quick gains may also see the fastest decline. However, seeing these kinds of abnormal gains that are played up by the media, one might find it tough not to participate in the market. But, an investor should always remember that investing is like lending someone your hard-earned money. If one does that without inquiring about the ability of the borrower to repay, then one is basically speculating.

As a corollary of this particular advice, we list here 10 stocks, among the BSE 500 companies, that managed to log huge short-term gains.

In the oil and gas sector, Essar Oil turned in an immense loss of Rs 1,230 crore for the quarter ending December 31, 2008 after its net sales came down 39 per cent over this period. But its scrip jumped on the news that it was getting delisted (It later turned out to be just a rumour).

Jai Corp saw a decline of 37 per cent in total income and its profit after tax (PAT) fell by 21 per cent for the FY09 October-December quarter. However, in the recent rally, its share price rose by more than 150 per cent. Even near-term history was not backing a boom for the company as its scrip, in the market crash of 2008, lost almost 94 per cent of its value.

As realty was one of the key beneficiaries of the current market rally, some companies like Housing Development & Infrastructure, Anant Raj Industries, and Lok Housing & Constructions, chalked up gains of more than 100 per cent on the bourses, but their earning performances are unimpressive — their PAT declined in the first three quarters of FY09 on QoQ basis.

Deccan Chronicle Holdings is a media company which, after delivering a net profit of Rs 102.94 crore in the December quarter of 2007, has been consistently falling to Rs 25.67 crore in December 2008 quarter.

The hospitality business fared no better. Country Club India has managed to lose around 93 per cent of its value in 2008 in the market crash, but in this rally it has gained more than 140 per cent. However, company data was not backing an upturn as its standalone net profit saw a fall of 45.71 per cent in the Q3 of FY09.

Engaged in the IT sector, Tanla Solutions, provides technology services for the wireless communication industry. It has seen a 43.39 per cent decline in net profits in Q3 of FY09. Although its stock jumped more than 140 per cent in the bull rally, it has a negative YTD returns of 26.31 per cent as on April 24, 2009.

The last company on our list is Hindustan Copper. It incurred a net loss of Rs 96.60 crore in the December quarter of FY09 as compared to the gains of Rs 18.39 crore in the previous quarter. It saw a fall in sales of 49.48 per cent over this period. The stock looks overvalued with a price over book value of 18.

Investors who do their home work, stick to basic investing principles and don’t chase every bull run, would know that investing in equity is all about long-term gains and they would therefore, tend to ignore the importance of the recent rally. Instead, they would be eyeing the gains from a consistent investment policy to fulfil a goal for which they had earmarked their investments.


Strong Performance
  PAT    Returns (%)        
  Dec-08  QoQ          
Company  (Rs cr)  Change (%)  Bull Run  2008  Price (Rs)  PE  PB
Essar Oil  -1230.00 - 168.67 -73.35 168.05 - 7.18
Jai Corp  14.87 -20.74 159.15 -93.53 194.75 38.08 1.33
Deccan Chronicle Holdings  25.67 -43.30 146.17 -80.30 64.25 11.69 1.37
Country Club (India)  0.19 -45.71 145.66 -92.74 17.54 4.03 0.20
Tanla Solutions  17.00 -43.39 142.76 -81.02 52.80 5.45 0.81
Housing Development & Infra. 184.88 -30.41 141.92 -84.44 153.50 3.09 0.96
Anant Raj Inds.  65.70 -48.01 119.88 -74.76 94.00 4.80 0.86
Lanco Infratech  58.73 47.27 117.42 -81.56 240.90 20.97 3.08
Lok Housing & Constructions  -1.75 -4.37 113.57 -93.81 24.86 7.60 0.31
Hindustan Copper -96.60 - 112.16 -80.85 183.20 1065.00 18.10
Data as on 24 April, 2009