There are some stocks which have fared better than the stock market

There are some stocks which have fared better than the stock market even in these days of gloom and doom. But can the outperformers continue to bring smiles to investors' faces? Karan Sehgal explores  GONE ARE the days when good stocks used to beat the stock market and bad ones used to underperform. If you find this too hard to believe, then randomly select a stock and compare its movement with that of the broader market. You will be surprised to see the uniformity of the movement between the two. The oft-repeated argument that the stock is down, but its fundamentals are in place, does not attract hordes of investors like it used to some time ago.
    The unprecedented crash has left stocks languishing at only a fraction of their peak value. In this 'sea of red' there are certain stocks, which have fallen, but not as much as the market. Of course, there are a number of stocks from the FMCG and pharma industry in the list, but life does not end there. There are many stocks from other industries too, which have outperformed the broader market. ET Intelligence Group attempts to find out whether the stock market is justified in giving a fairer treatment to these stocks.
    It is rather surprising that two stocks related to the auto industry — Hero Honda and Exide Industries — have fared better than the market. In fact, Hero Honda is one of the rare stocks to have actually posted positive returns since January 8, when the market had peaked. The company has performed much better than its rival Bajaj Auto on all counts. Its topline growth has been robust as the sales of entry-level bikes — Hero Honda's stronghold — do not depend much on the availability of finance, which has almost dried up. The company has managed to control its costs even as rising metal prices were giving sleepless nights to auto manufacturers. The meltdown in metal prices will definitely help the company to improve its margins. The worry for investors is that though the company has been able to sell more motorcycles than its competitors, it is doing this in a market, which is passing through a rough patch. The company may find things challenging, going ahead.
    Exide Industries, the leading manufacturer of batteries, does not face as big a challenge as Hero Honda, since it supplies batteries to auto manufacturers and other industries like power and telecom. Auto contributes 60% of the company's sales. However, an auto slowdown will not hit the company too hard, as a huge chunk of its sale flow from the replacement market. Given that the past 3-4 years have seen an unprecedented bull run in auto sales, the replacement market will surely bear fruits in future. Moreover, there is no such slowdown expected in industries like power and telecom. In fact, as new telecom players come in and the existing ones increase their reach, the demand for batteries for their networks will increase.
    Exide's stock price has fallen to Rs 45.90 from the peak of Rs 91. It is interesting to notice that the stock more than doubled in '07; hence, the fall in '08 appears too steep. Without any significant change in fundamentals and with such a low price, Exide provides an attractive opportunity for investors. Hero Honda's stock rose this year, while it did not move much last year. This may indicate that the market has now factored its performance in valuations and though there is headroom to generate returns, it is not as high as in the case of Exide.
    Two software giants, too, fall in the list — Infosys Technologies and Satyam Computer Services. The stock prices of software companies started cooling off in '07 itself. Therefore, this year, their stock prices obviously fared better than the market. What must not be overlooked is that these two companies performed much better than their peers. So, the fundamentals of their business support the relative treatment given to their stock prices in '08.
    For instance, Infosys managed to escape any trouble from its client base in the US. Its topline has seen a modest growth rate, and in fact, its operating margin has increased in the September '08 quarter. Its net employee addition, an indicator of the confidence of the company to get future projects, has also remained strong. Satyam Computer, too, has seen robust growth in topline. However, its net employee addition in the past few quarters has remained volatile and does not give a clear picture about the company's confidence regarding future projects. At current levels, Infosys provides attractive opportunities to investors, so fresh exposures can be considered. Satyam Computer is not as attractive a buy as Infosys. Therefore, investors can hold, but not increase their exposure to this stock.
    The largest telecom services provider, Bharti Airtel, too, has bucked the trend and outperformed the market. At current valuations of 17.5 times price-toearnings, investors should consider fresh exposure, as the company has a track record of posting high earnings growth. There is a tremendous scope for growth as telecom penetration is just 30% in India, which is one of the largest growing telecom markets in the world. Moreover, Bharti has established itself within the GSM segment for a long time. At a time when other CDMA players are trying to enter the GSM segment, Bharti has already invested in the same. Therefore, it bears little risk in terms of customer addition and has better visibility in cash flows. If it manages a 3G spectrum (which is very likely), that will further enhance its GSM service offerings.
    Two oil marketing companies — HPCL and BPCL — have also outperformed the markets. Given that oil prices have come down by more than 60% since they reached their peaks in July '08, it is expected that these two companies will do better in the near future. This is because these companies have already started making small profits on sale of transport fuels like petrol and diesel, which account for nearly half of India's petroleum consumption. The losses on LPG and kerosene continue, but they together represent less than 15% of India's petroleum consumption. This change of fortunes is helping the share
prices of these oil marketing companies. Investors can consider exposure to these companies, but they should keep an eye on oil prices, as their fortunes are closely linked.
    Fertiliser companies are another surprise, as they have also outperformed the market. The government's policy change in July '08, wherein it linked the subsidy to import parity prices, was a substantial development for fertiliser companies, which had been facing tough times, as subsidy was linked to the old cost plus method. Coromandel Fertilisers, which is one of the leading phosphatic fertiliser manufacturers, and Chambal Fertilisers, which is the largest urea producer in the private sector, are set to perform much better in the days to come and investors can consider fresh exposures to these stocks.
    It is clear that a few of these outperformers like Exide, Infosys and Bharti Airtel provide very good entry points to investors today, than they ever have in the past 2-3 years. This is because today, their stock prices are taking a beating, even as their fundamentals are in shape. The risk is relatively more in the case of Hero Honda, which is performing well, but its future is challenging. Similarly, investments in stocks of fertiliser and oil marketing companies come at a higher risk as these sectors are heavily regulated.
    (With inputs by Ramkrishna Kashelkar
    and Santanu Mishra)