At 15000 points, the BSE Sensex is now at a level that many investors would not have believed possible just two years ago. Agreed, stock prices have repeatedly broken previous highs and crossed new milestones in recent years. But what distinguishes the recent rally to 15000 from the others before it? And what were the key sector- and stock-specific drivers this time?
The universe of listed stocks was categorised into different market capitalisation ranges to unearth trends in large-, mid- and small-cap stocks in the recent rally. The following trends distinguished the current rally from that of September 2006 (when the index regained its May peak):
The present rally enjoyed broader participation from the large-cap and emerging large-cap stocks. The rally was also marked by the resurgence of mid-cap stocks, driven by strong earnings; these occupy big chunks of most individual inve stors’ portfolios.
Apart from infrastructure, capital goods and the others in the limelight, low-profile sectors such as steel and banking were the key drivers. This rally actually saw a greater divergence between sectors, in contrast to the investor beh aviour in 2006, when most sectors underwent a re-rating.
The returns show considerable divergence in returns between individual stocks within a sector, some notching up gains while others suffered losses. This suggests that this time round, investors paid more attention to individual busines ses and their prospects, rather than going by a broad sectoral “theme.”
The recent gains in stock prices were in the backdrop of firm global cues, steady inflows from foreign institutional investors and mutual funds, and with improving liquidity playing its part in leading the Sensex to the magical 15k point. The conclusions are based on an analysis of stock price returns between February 8, 2007 (the previous market peak), just before the interim sell-off began, and July 6, when the Sensex breached the 15k level. A universe of 2,476 stocks was considered.
More large-caps
The latest market rally was marked by a broad-based participation, even within the universe of 121 large-cap stocks (defined as those with a market capitalisation of over Rs 5000 crore). Interestingly, six out of ten stocks in this space now trade at values higher than their February levels; every third stock in the category gained more than 20 per cent.
The gainers list featured unexpected stocks — GMR Infrastructure (72 per cent), Reliance Petroleum (67 per cent), Aban Offshore (66 per cent), Reliance Capital (59 per cent) and ABB (48 per cent) being some of the prominent gainers.
The rally was also marked by the absence of the usual performers such as Infosys, TCS and auto majors Tata Motors, M&M and Bajaj Auto. While Bajaj Auto (30 per cent decline) led the losers list, stocks such as Essar Steel, Bharat Forge, Hindalco and ITC lost about 10-20 per cent in value.
Emerging large-cap stocks, however, remained in the neutral zone, with only about 56 per cent of them gaining in value. Given the investor fancy for stocks in the capital goods, engineering, realty and construction sectors, it was not a shock to see them top the gainers’ list in their segments.
One out of six stocks that gained belonged to these sectors. However, some stocks from these sectors also figured in the losers’ list, pointing to a possible shift in stock preferences within these sectors.
While stocks such as Alstom Projects, Praj Industries, AIA Engineering and Voltas notched up gains, Atlanta, Ansal Properties, Mahindra Gesco and Akruti Nirman were lower by 16-75 per cent.
Pharma stocks, bucking their previous trend, gained in value. With the exception of Divi’s Lab (77 per cent gains), the gains were modest, with half the stocks appreciating 6-15 per cent.
Emerging large-caps have been defined as those with a market capitalisation of Rs 2,000-5,000 crore, which is a sample of 118 stocks.
Mid-caps join in
The most important trend evident from the recent rally is the revival in mid-cap stocks, after a prolonged sluggish phase. In stark contrast to the September 2006 rally, the current upsurge could, to a great extent, be attributed to the participation of mid-cap stocks. While the re-rating of mid-cap stocks could well be a function of the good earnings numbers, a good chunk of the gains can also be attributed to the perceived stiff valuations for large-cap stocks, which forced investors to look elsewhere for opportunities.
In the year ended March 2007, mid-cap stocks constituting the CNX Midcap Index recorded about 56 per cent growth in earnings on the back of a 45 per cent increase in revenues.
Another notable feature was investors’ greater selectivity in stocks and sectors. While capital goods, construction and engineering retained their attention; individual stocks within the sectors recorded divergent trends.
Sugar stocks, backed by institutional and fund buying, made a comeback, appreciating 9-100 per cent. Other prominent gainers were India Infoline (97 per cent), NIIT (91 per cent), IFCI (90 per cent), Asian Electronics (72 per cent) and UTV Software (67 per cent).
Manugraph India, GHCL, Welspun India, Allsec Technologies and Ansal Housing, however, topped the losers’ list, shedding 27-37 per cent.
While the overall picture remained bland with one stock appreciating for every one that declined, it was worth noting that mid-cap stocks recorded the highest price appreciation during this period relative to other market cap categories. Mid-caps are defined as stocks with a market capitalisation of Rs 500-2,000 crore — a sample of 314 stocks in the analysis.
Small-caps, however, remained the only category to be left out of the party. Seven out of ten stocks failed to touch their February highs. Some of the well-known small-caps that suffered erosion were House of Pearl, KRBL, Lok Housing, Marg Constructions and R-Systems.
However, driven by news, select stocks did see a build-up in buying interest. Stocks such as Usher Agro (259 per cent), Autolite Industries (221 per cent), Oil Country (153 per cent), Bank of Rajasthan (66 per cent) and TRF (54 per cent) appreciated in value.
Small-caps are stocks with market capitalisation less than Rs 2,000 crore, which were 1,923 stocks in the total sample.
Sectoral trends
Though the popularity of sectors such as construction, engineering and capital goods was apparent in the current rally, a study of stock prices on a sectoral basis did throw up a few surprise performances.
Steel stocks, unlike the September rally, topped the gainers list with an average price increase of 18 per cent. Among the prominent performers in this sector were Bhushan Steel, Jindal Steel and JSW Steel. Tata Steel also made a strong rebound, gaining about 35 per cent.
Banks, media, retail and telecom service providers followed next in the list. Bank of Rajasthan, Prime Focus and Bharti Airtel were among the prominent gainers in these sectors, respectively.
Concerns on interest rate hikes and an impending slowdown of the heavy commercial vehicles segment took its toll on auto companies, which slumped about 20 per cent.
Cement stocks, too, fell on policy intervention in cement pricing. Notably, Budget blues extended to other sectors as well. The withdrawal of the 80IA tax benefit for construction companies with retrospective effect led to underperformance of stocks in the sector.
However, IT stocks, conspicuous by their absence in the recent rally, had good reason for their underperformance.
The introduction of the minimum alternate tax and proposal to bring employee stock options under the fringe benefit tax scanner added to the sector’s woes, as did the sudden spurt in the rupee vis-À-vis the dollar.
Textile stocks too suffered on the bourses; another backlash of the rupee appreciation. Eight out of ten stocks in the sector quoted at prices lower than February levels. Birla VXL, Raj Rayon and Celebrity Fashions were some of the stocks that shed value.
Pointers to investors
Overall market capitalisation between the two highs registered a 13 per cent growth while the Sensex value appreciated only 2 per cent, suggesting that the Sensex gains have dampened wealth creation for investors.
Total turnover in both cash market and derivative segment have grown by about 50 per cent over this period, suggesting greater investor participation. In the same period, foreign institutional investors pumped in about Rs 18,500 crore.
Despite concerns on this score, liquidity remained comfortable with companies raising about Rs 25,000 crore through initial public offers and other offers during this period.
Despite rising stock prices, institutions and the owners of businesses remained confident about their companies. Promoter holdings increased in about 17 per cent of the stocks, while 15 per cent of the stocks saw an increase in foreign institutional holdings.