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BW Businessworld

Walking A Tightrope

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If one scans the portfolios of the top 10 equity mutual funds in terms of assets under management (AUM), Infosys will be figure in all of them. But in the past 10 years, the software bellwether's stock has been among the worst-performing stocks. Between 31 March 2003 and 31 March 2012, the Infosys stock (adjusted for dividend, bonus and split) has recorded 467 per cent returns — impressive when compared to the sovereign return of a fixed 8 per cent, but dismal when compared to the BSE 500 index, which gave a return of over 530 per cent.

Infosys is not alone; top software companies Wipro and Mahindra Satyam (erstwhile Satyam Computers) have also been poor performers. In 10 years, Wipro reported a 257-per cent return, while Mahindra Satyam eroded investor capital. The erstwhile Satyam's stock was among the top performers until its founder Ramalinga Raju confessed in January 2009 that the company's accounts had been falsified for years by overstating revenues and inflating profits by a $1 billion. The stock crashed 78 per cent on 7 January 2009 after the confession and, till date, has not regained its old sheen.

In absolute terms, these companies may have underperformed the benchmark, but on a year-on-year basis, Infosys and Wipro have outperformed the BSE 500 in six of the 10 years, while Mahindra Satyam has outperformed it in five.

Says Sandeep Singal, co-head of institutional equities at Emkay Global, a Mumbai-based financial services firm: "This is because of a high base effect. In the early 2000s, stocks of software companies were trading at a premium as the companies were earning high margins. But today these companies have become a commodity. In fact, this is also true for most of the new economy sectors such as telecom and media where margins have skewed. This is why Zee (Entertainment) has underperformed." In the past 10 years, Zee Entertainment has returned 305 per cent and has underperformed the index in six years. The company was a part of the ICE (information technology, communication and entertainment) sector, and all the three segments today do not have the pricing power they used to enjoy in the late 1990s and early 2000s.

Click To View Enlarged Graphic

The Black Sheep
The 184 companies that underperformed the BSE 500 in the past 10 years have returned 258 per cent on an average. Of these, 27 companies, or 15 per cent, are in the textile sector. The worst among them have eroded investor wealth, giving negative returns in the 13-80 per cent range.

Another sector that has been disappointing is pharmaceuticals. With pharmaceuticals perceived to be a defensive sector (in the limelight only when the market turns bad), the bull run over many years saw the sector getting neglected. But that is not the only reason for the underperformance. In the early 2000s, pharmaceutical companies rallied on the back of copycat (generic) drugs and bulk drugs formulations. However, stringent regulation and the absence of any major discovery in the Indian generic space saw the companies lose traction.

Says Avinnash Gorakssakar, director,, a Mumbai-based investment advisory firm: "Ten years ago, cost of capital was high. Most of the companies that have underperformed also had huge debt. Apart from that, companies with conservative management have not fared well compared to peers because they lacked innovation and product differentiation. One good example would be TVS Motors and Ashok Leyland in the auto space; they lost out to Bajaj Auto and Tata Motors."

The effect of inactive managements can be seen especially in state-run companies such as MTNL, Shipping Corporation, National Aluminium, Oil and Natural Gas Corporation, and others. Gorakssakar goes a step further. He says companies with a global mindset have fared better than inward-looking competitors. For instance, Hindalco had been an underperformer over the past 10 years with a return of 184 per cent. But after acquiring Canada-based Novelis, more than half of Hindalco's earnings are independent of aluminium price volatility.

It is also true that what was bad yesterday does not have to be bad today. Hindustan Unilever (HUL) is a classic example. The stock's performance over a period of nine years has been a disaster. Governments bonds with a fixed 8 per cent return would have been better. But in the past year, it has gained 44 per cent. "Therefore, it becomes necessary to churn your portfolio. Today, a stock can be good, but with the fast changing global and domestic business environment, one has to see how it will be in future," says Singal of Emkay Global. He adds, "In the long term, equity as an asset class gives a consistent 20 per cent return, but not as a single stock."


(This story was published in Businessworld Issue Dated 28-05-2012)