Within a period of just six trading sessions, the stock price of Philips jumped from Rs 55 to Rs 84. The fact that Royal Philips Electronics NV of Holland has decided to increase its stake in Philips India, from 51 per cent to 74 per cent, has triggered the rally. The parent company has offered to buy the stocks at Rs 105, 20 per cent higher than the current market price of Rs 84.The latest development suggests that the parent company has full faith in its local arm and expects a positive outlook in the long term.
Philips India's performance has been far from impressive in the recent past. The company's market share in CTVs has shown a sharp decline in the last few years, and has affected its profit margin badly. Due to the depressed market conditions and the poor performance, the stock had also been on a major downward spiral. For this reason, if the intentions are good, the timing for an increase in stake appear right and the parent company is expected to get all the required supply at the offered price of Rs 105.
While it is true that the an increase in stake by the parent company will enthuse confidence in its local arm's performance, the stock market may take some time to give a higher discounting to the stock.
The reason is simple. The parent company already has a majority stake, and the increase will not affect the MNC status. In fact, when the parent company buys up the required stake, the floating stock in the market will take a sharp dip which is not a healthy sign for its market discounting in the long run.
The consumer electronic industry is already getting a meagre discounting. Nearly all the stocks, BPL, Videocon Int and Philips, have taken a hard beating in the last 12 months.
With the entry of foreign players like Samsung, LG and Akai, the CTV market has become extremely competitive and has affected the profit margins of the older players badly. At the same time, the demand has also not shown desired growth, and the outlook continue to remain negative as far as the profit margins are concerned. In such a scenario, one cannot expect a smart improvement in the short run and the overall market discounting for the sector will continue to remain at low levels.
Technically speaking, the stock has shown a smart improvement which was accompanied by a sharp jump in volume. This means that, despite such a positive news, supply was ample. The stock has a strong resistance in the range of Rs 100-110 - nearly the same price that the parent company has offered.
For investors, if a price of Rs 90 plus materialises in the open market, exit appears a better policy. Re-entry can be considered later. The stock has a strong support at Rs 50 which can be used as stop loss by long term investors.
Copyright © 2000 Indian Express Newspapers (Bombay) Ltd.