Weaklings outperform BSE Sensex as markets high tide carries all

Written by Devangi Gandhi | Mumbai | Updated: Dec 12 2013, 18:54pm hrs
Sensex, Adani EnterprisesAdani Enterprises also witnessed strong gains of the order of 77% during the period (Reuters)
While a handful of blue-chip index heavyweights have pushed the BSE Sensex to an all-time high in the last three months, the latest market rally has also seen stocks of a number of fundamentally weak companies outperforming the benchmark index.

Markets Top Gainers, Markets Top Losers

Since mid-August this year, the 30-share Sensex has gained 3,349 points, or close to 19%, and touched a record high of 21,326.42. Nearly 60% of these gains were contributed by seven index stocks, which collectively added 1,979 Sensex points. However, across the broader market, 57 companies from the BSE 100 universe outdid the Sensex during the period. Interestingly, almost half of these outperformers belonged to capital-intensive and interest rate-sensitive sectors that are impacted by weak economic fundamentals.

The list includes highly leveraged infra and construction majors that witnessed a sharp fall in their profitability during the September quarter, such as JP Associates, GMR Infra, HDIL and Suzlon energy. The stock prices of these companies, which collectively have a debt burden of more than R1.2 lakh crore, have rallied 80%, 77%, 64% and 46%, respectively, as of Tuesday from their August 2013 lows. Adani Enterprises, which turned loss-making during the last two quarters, also witnessed strong gains of the order of 77% during the period.

Many of these stocks, which have outstripped sensexs returns by two to four times, are considered high-beta stocks and, hence, tend to move more sharply than the benchmark. Beta is a measure of volatility that represents a stocks tendency to respond to the swings in the market; a number higher than 1 indicates that the stocks price volatility will be higher than that of the benchmarks.

Capital goods and engineering majors, Siemens, BHEL and Crompton Greaves, which had fallen to their multi-year lows in August, have since gained 45-63% as investors saw value in these stocks at lower levels.

BHEL, in particular, witnessed strong buying interest as it fell to its lowest in eight years. While the company reported weak operational and margin performance during the September-ended quarter, gains from other income boosted quarterly profits. However, analysts continue to expect earnings to remain flat due to lower order inflow visibility and rising competition from Chinese players. Ambit Capital in a recent note called the stock a value trap and maintained its Sell rating on the stock. Ambit expects a further decline in the stocks RoE (return on equity).

Even public sector banks, such as Bank of Baroda and Punjab National Bank, have outdone the Sensex in the recent rally due to their attractive valuations even though concerns around weak asset quality persist. These stocks were trading at 30-40% discount to their five-year average book value for the most part of the last three months.

The frontrunners of the market rally since the last week of August also included mining and metal majors such as JSW Steel, Tata Steel and SAIL. Each of these have rallied more than 70% over the period. However, the operating environment of these companies, especially those catering to the domestic market, remains challenging, with factors such as a likely correction in Chinese iron ore prices also seen as an uncertainty.