Heavy equipment manufacturer BEML Ltd’s provisional results for the year ended March 2008 do little to lift the gloom off its share price performance. The company announced that gross sales rose 15.5% to Rs3,005 crore and profit before tax increased by 11% to Rs350 crore. Earlier in the year, the company had diluted equity by 13.3% through a follow-on public offering. In effect, earnings per share would decrease using the diluted equity.
BEML shares rose marginally in a flat market, indicating perhaps that the markets weren’t disappointed. But note that the shares have underperformed the Nifty by about 25% this year and have nearly halved from their all-time high. Besides, one could be excused for thinking that fourth quarter results were impressive, considering that sales had grown by just 0.2% in the first three quarters and profit before tax had risen by less than 3%. According to the provisional results for the year, fourth-quarter profit would increase by about 28%.
Yet, that’s nothing to get excited about—traditionally, about three-fourths of the company’s annual profit is made in the second half of the year, with the majority coming in the fourth quarter. FY08 was little different. An analyst with a domestic brokerage, who did not want to be named, points out that the company had earlier indicated it will close the year with revenues of Rs3,300 crore. This implies a near 10% shortfall. The analyst says that earnings targets for FY08 will now be achieved only in FY09.
BEML has said that it expects revenues to grow by about 18-20% this financial year, based largely on its order book of Rs3,800 crore, much of which will be completed this year. The target and the growth achieved last year are unexciting for a company that caters to the hot mining and metro rail sectors. Competition from foreign majors in the core earth moving equipment business seems to be taking its toll. Thankfully, valuations have adjusted to about 16 times forward earnings, in line with realistic growth expectations.
Bear market rallies
The rally in the US markets on Tuesday was unexpected, particularly because it came on the back of the announcement of massive write-offs in UBS AG. It’s strange, to say the least, when the stock of a company rallies after it has just announced net losses equal to one-third of its net worth and announced plans for a massive dilution.
The bulls argue that the ease with which banks are now able to get fresh capital is an indication that the worst is behind the big banks. Whatever be the reason for the rally, the fact is that markets put a positive spin on news that could easily have been interpreted negatively.
Perhaps the rally is nothing more than a pointer to the huge amount of money parked on the sidelines looking for a home. According to data from EPFR Global, the research outfit that tracks fund flows, investors are keeping their cash in money market funds, which took inasmuch as $17.2 billion in the last week of March alone. But that’s money waiting to be put to use and it can rush into opportunities at any time, sending asset prices up sharply. (Of course, it can rush back out of assets too with equal alacrity, as seen from the savage mauling recently meted out to commodities and gold).
It’s this combination of plentiful liquidity with rising uncertainty that leads to volatility. We’ve had sharp rallies in a bear market before. During the last bear market, after the Sensex crashed from a high of 6,150 in February 2000 to a low of 3,831 in May, a 38% fall, it then jumped back to 5,058 by July, a rebound of 32%.
Another similar bounce occurred after reaching a low of 3,491 in October 2000, with the Sensex going up to 4,462 by February 2001—a pullback of 28%. In April 2001, it reached a low of 3,096 before it went up to 3,759 in the following month.
Similar rallies occurred in the Nasdaq Composite index as well during the tech bust. For instance, immediately after falling from its peak of 5,132 in March 2000 to 3,042 by May, the index rallied to 4,073 by June, a gain of 34%. It rallied again between August and September 2000 by 21%. In 2001, it went up from a low of 1,619 hit in April to a high of 2,328 in May, a gain of 44%.
Interestingly, Wednesday’s rally soon petered out in the Indian market, another sign that India’s premium valuations do not find favour with fund managers.
Global fund managers are the most underweight on China and India, in that order. That’s the reason why the Chinese and the Indian markets have been the worst performing markets this year.
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