Cash In Before the Crash

The recent stock market rally has seen prices of a few scrips rise without change in fundamentals. Karan Sehgal hunts for stocks that can be offloaded at current levels before the market tanks again

    THE stock market has been reaching for the skies since early March 2009. Over the past six weeks, the 50-share Nifty has gained by more than a third. Many stocks have surged past the broader index, even as the slowdown takes a toll on their fundamentals. For retail investors, though, there couldn't be a better time to book profits; they could even consider re-entering the market at lower levels. The stock market has been through similar rallies in the past, and there is a strong likelihood that it will be followed by a slump, providing an attractive opportunity to investors who are willing to wait it out. ETIG picks out some stocks that have off late seen huge jumps, providing investors with a golden opportunity to sell. Tata Motors has seen its stock price rise by nearly 80% since early March. The company is a commercial vehicle (CV) manufacturer, a sector that is witnessing its worst slump in recent times. CV sales were down by 50% in March 2009 on a year-on-year basis. The company incurred a loss of Rs 84.5 crore on a standalone basis in the December 2008 quarter. Moreover, it needs huge reserves for Jaguar and Land Rover, which it has acquired. Traditionally, the twists and turns in the CV industry's performance are far greater than those of the economy. In a downturn, this is only expected to aggravate.
    Similarly, Suzlon Energy's stock has witnessed a 80.3% rise in price in the past one-and-a-half months. The company incurred a loss in the December 2008 quarter. Even after excluding exceptional losses on account of foreign exchange and blade restoration costs, its performance was dismal. Defective blade issues and the global slowdown continue to cripple its performance.
    Siemens is another cyclical stock. Its price has risen by 58.5% since March 2009. This capital goods giant has seen its topline shrinking in the December 2008 quarter, as its sales fell by 14.9% on a year-on-year basis. Much like automobiles, the capital goods industry also witnesses higher variability than the economy. It will see tough times ahead as corporates postpone capital expenditure. Fundamentally, then, Siemens is in a weak spot right now and investors could use the recent surge in its stock price to book profits.
    Close on its heels is Reliance Communications (Rcom), which has seen its stock price jump by 68.9% in the past six weeks. However, the company's performance in terms of revenue and net profit is way behind that of other players in the industry like Bharti Airtel and Idea Cellular. In the December 2008 quarter, Reliance Communication's sales and net profit grew by 18.8% and 2.7% compared to the 39.1% and 38.3% growth reported by Bharti Airtel.
    Reliance Infrastructure (Rel Infra) too has seen its share price go up by 62.3% since the market started rising in the beginning of March, while the fundamentals haven't really changed. In fact, its profit fell by 16.5% in December 2008 quarter.
    Moreover, the company is planning to transform itself from a power utility to an infrastructure company. It is an equity investor in the Mumbai Metro Rail project and road projects of the National Highway Authority of India. Such projects have long gestation periods. Revenue and profits projections are stretched, making investments in the company loaded with risk. Retail investors could use the opportunity provided by the markets to reduce exposure to this stock.
    Another company, which falls into this category, is Reliance Capital (Rcap), a non banking finance company (NBFC) with a presence in asset management, distribution, insurance and consumer banking. Its stock price has risen by 89.4% in the current run, while its performance is hardly anything to write home about. This is because of the slowing economy, which has affected the financial services industry's growth. Most NBFCs are re-evaluating their growth plans. Reliance Capital's profit grew by just 11.3% in the December 2008 quarter. Moreover, the company's performance has poor visibility due to its presence in many businesses.
    Metal companies Tata Steel and Sterlite Industries too have seen their stock prices rise by 72.5% & 59.4% respectively. Metals — which have one of the longest cycles in industry — are well past their prime.
    Up until last year, high demand growth in China was fuelling metal prices. This phase is now over, with demand for metals likely to be subdued in the near-to-medium-term, and the two companies' third quarter results clearly showed this. While Sterlite's net profit declined by 38.5% YoY in the December 2008 quarter, Tata Steel saw a 21.5% slump in profits. It is clear that the rally in these two scrips is purely for technical reasons — where it is merely following a market trend — and investors could reduce exposure to these stocks. ICICI Bank too witnessed a 61.1% rise in its stock price since March. The bank continues to be a laggard among its domestic peers, going by its FY09 performance. Its net profit has remained flat in the first nine months of FY09. Moreover, the banking industry will face tough times as credit growth slows and non-performing assets go up. Retail investors should thus use the rally to book profits and wait for the market to cool before making their next move. Real estate players like Unitech and DLF have also been at the forefront of this rally. The two stocks have appreciated by 84.5% and 71.6% respectively since early March. Both these companies have undertaken ambitious debt restructuring to improve their financial situation. Unitech's outstanding debt is at Rs 8,500 crore as on March 2009. It was able to restructure Rs 1,000 crore, which will be due for repayment in the second half of fiscal 2010, depending on the restructuring terms. The company has also managed to place its QIP and repay mutual funds. Similarly, DLF has managed to replace Rs 4,000 crore of short-term debt payable in calendar 2009 with long-term debt. It appears that the stock price has factored in the improvement in fundamentals, and it makes sense for investors to reduce a portion of their holding in these two real estate companies at current levels. While the current rally may call for a reduction in exposure to these stocks, many of the companies dissected here could prove to be a good bet over a very long horizon. If an investor does want to remain long in one of these stocks, he can sell a part of its holdings now, and buy it again at lower price, bringing down the average acquisition cost. (With contributions from Krishna Kant and Supriya Verma Mishra)
karan.sehgal@timesgroup.com