At its lowest point on Friday, the Sensex, India’s benchmark stock index, was only 2.3% above the lows it reached on 22 January, when it had fallen to this year’s lowest point at 15,332. But in the last one-and-a-half months, the way the market looks has changed beyond recognition.
For instance, banks, once touted to be the best play on the strength of the Indian economy, have been severe underperformers. That’s evident from the fact that, at its low point on Friday, the BSE Bankex, the sectoral index, was as much as 11.2% lower than its lowest point on 22 January. Among the Sensex stocks, State Bank of India, HDFC Bank Ltd and ICICI Bank all closed Friday at levels well below the depths they plumbed on 22 January. The BSE Realty index was also, at its lowest point on Friday, lower as much as 10% than the lows it reached on 22 January. DLF, for instance, closed on Friday at Rs657, while its low on 22 January had been much higher, Rs740. The capital goods and power sectors have also underperformed. Larsen and Toubro Ltd (L&T), for instance, closed on Friday at Rs2,988, below the low of Rs3,000 it reached on 22 January. So, which are the sectors that have been buoying up the Sensex? The Auto index, at its lowest point on Friday, was as much as 11.8% higher than its lows on 22 January. The health care index has done even better, with its Friday low being 15.1% above the low of 22 January. On the same comparison, the IT index is up 11.7% and the FMCG index 14%. To cut a long story short, just as it used to be a two-speed market earlier, with the capital goods, bank, realty and power stocks doing well, and IT, health care, FMCG and auto languishing, the reverse is now true.
Is that because sectors such as FMCG, health care and auto are less richly valued? That could be true, but the more likely story is that investors have sold stocks on which they were sitting on profits. In times of trouble, investors have a penchant for latching on to FMCG and pharma stocks, which have earnings visibility, but that begs the question why the capital goods stocks, which have order visibility for the next two-three years, should go down. Perhaps it’s a question of valuations. As for banking stocks, most of the blame can be laid at the government’s door.
Lack of liquidity due to long-term investments hurts Bosch shares
Bosch Ltd (formerly Motor Industries Co. Ltd) has lost 35% from its highs in December, a little unusual for a company that’s steadily growing revenues on the back of continued financial and technological support from its parent. Such sharp falls in share prices have been reserved for stocks with excessive speculation—for instance, real estate stocks have fallen about 40% in value.
But Bosch shares suffer from low liquidity as much of its free float is held by state-run financial institutions as a long-term investment. Due to this, the price movement can tend to get exaggerated.
In 2007, the company’s parent group did a buyback of shares and followed that up with a commitment to extend its annual investment of about €80 million (Rs499 crore today) in Indian operations till 2010 (from 2008). Because the parent company doesn’t issue itself shares/warrants/bonds in exchange for its cash infusion, minority shareholders gain at the expense of the parent firm, and the news led to buying in the Bosch counter.
But at its peak, the stock was valued as high as 31 times 2007 earnings, rather high for a company that’s been growing core earnings by less than 10% for the last three years. In 2007, even sales growth fell to 13%, from 22.5% in 2006 and 27.8% in 2005. This was due to the slowdown last year in the automobile industry, especially in the heavy commercial vehicle, two-wheeler and tractor segments. But thankfully, the decline in operating margin was restricted to about 100 basis points (it had fallen 300 and 400 basis points, respectively, in the preceding two years). Still operating profit growth, at 6.8%, was just slightly higher than the 4.5% achieved in the previous year.
As India is expected to be a hub for small cars, Bosch’s Indian operations are expected to benefit. At current levels, the stock trades at about 20 times trailing earnings, which seems reasonable considering its decent long-term prospects, the parent’s commitment to the Indian subsidiary and chances of another buyback. The current slowdown in India’s automobile industry, however, will continue to weigh on its performance in the near term.
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