Policy paralysis, uncertainties and poor corporate governance standards have combined to make investors wary of companies in vulnerable sectors. In the last one year, FE?s Policy Sensitive Index (PSI) comprising stocks of 22 companies, has grossly underperformed the Sensex.
In the last one year, PSI gave a negative return of 21.5% as against a 9.8% fall in the Sensex. Till October 2009, the PSI index was moving almost in tandem with the Sensex.
The dismal show of policy-sensitive stocks is in striking contrast to the fact that stocks of firms that are by and large immune to policy decisions have outperformed the Sensex. When it comes to FMCG stocks, this trend was especially evident in the recent sessions. As reported by FE, leading FMCG firms including ITC, Colgate and Marico were among the more than two dozen stocks which hit their lifetime highs last Wednesday.
The fortunes of PSI companies are, to a considerable extent, reliant on political decisions and policy arbitrage related to land, environment and other natural resources. But policy impasse and the series of scams have pulled down PSI?s performance compared to the broader market.
While uncertainties in oil subsidies or sugar pricing are known to regularly rock stocks of relevant companies, this time around, frequent scandals have added to market concerns. At least 9% of the total market capitalisation of the Indian stock market is affected by the ambivalence over policies and political developments.
?As an investment philosophy, we stay away from stocks of companies with a track record of poor corporate governance,? says Ajit Dayal, founder chairman of Quantum Asset management. ?We have little or no comfort with their operations and are ready to take the risk of under-performance from not owning such stocks.?
In the past, taxation of oil companies, timing and quantum of price changes in petroleum products and additional levies on cement prices used to affect stocks of companies in these sectors. The quantum of hike in the minimum support price for sugarcane or the speed with which construction projects are granted too had invariably impacted stock prices of companies. Of late, policy uncertainties have become more damaging, affecting companies in many segments.
For example, banning iron ore exports pulled down Sesa Goa shares while the unravelling 2G scam hit DB Realty, DLF, Unitech and Reliance Communications. Kalanithi Maran-promoted Sun TV and Spicejet as well as stocks of Anil Ambani Group slumped after the start of CBI investigations.
Policies and scandals have often taken their toll on companies in telecom, oil marketing, infrastructure, realty, sugar, fertilisers and aviation.
However, some fund managers believe the fall in market capitalisation of policy-sensitive companies can’t be fully attributed to delays in government decisions or corporate governance issues. Piyush Garg, CIO, ICICI Securities said: ?Stock prices of infrastructure and realty companies have fallen more due to their weak fundamentals rather than poor corporate governance.?
He added that these companies were overrated during the last bull run and they continue to struggle with liquidity, debt and land acquisition issues. According to Garga, one has to look at corporate governance and transparency on a case-to-case basis.
Various studies in the past have shown that companies with lower corporate governance standards tend to get valued lower ? in the form of, say, lower price-to-earnings multiples. And often, institutional investors stay away from such stocks.
On wednesday, stock price of India’s biggest sugar producer Bajaj and other sugar companies surged on the Bombay Stock Exchange after the government allowed the shipment of five lakh tonnes of the sweetener yesterday.
On Thursday, it was the time of fertiliser companies to go up ahead of cabinet meet on DAP deregulation.
As if the existing market volatility was not enough, government seems to be adding to it.
