FY07 has passed us by and we are already coming closer to the last trading day of the first week of FY08. However, if one were to describe the mood of the markets during the last month of FY07 and break it up into four weeks, it was anything but predictable. The benchmark indices did everything they are supposed to do: rise, fall, stay rooted and even have a steep plunge in a matter of an hour. But if you leave aside the antics and focus on the net result, it does not make for a pretty picture. Both the benchmark indices viz. 'Sensex' and 'Nifty' have edged lower by around 3% in the month of March. However, this has not deterred investors to load up on few heavyweights and make them move in opposite direction. The focus of this article is on those top five stocks on the Nifty that have inched higher during the month and the likely reasons behind the same.
If the list is anything to go by, investors seemed to have taken current themes like 'high inflation' and 'stretched valuations' really to heart. For while the top two stocks haven't really gone anywhere in the past one year, thus implying that they are relatively cheap as compared to others, the remaining three are largely immune from the high inflationary environment that has currently engulfed quite a few industries. Let us see if there are any further reasons behind their ascent in the last one month.
VSNL, the top gainer in March with gains of 10% made most of its gains in just one day when it edged higher by 10.3% on the back of reports of a possible sale of its surplus land, which could fetch the company a huge sum of Rs 100 bn. However, the news just turned out to be rumors as the company clarified that is was not aware of any such development. There was another development in the form of the company being in the process of hiving off its retail business undertaking comprising broadband and Internet services into a subsidiary, DIL Internet, for upto Rs 4 bn. While this step may help the management to run the company better, as far as the long-term prospects are concerned, they largely hinge upon the company's ability to address the integration issues that have arose so often in following an inorganic growth strategy. Until then, we will look at the company's growth with utmost caution.
HLL, the FMCG behemoth is second on the list with gains of near 9%. Like VSNL, HLL too has been an underperformer in the past one year. The valuations of the company had hit historical lows in recent times and investors seemed to have grabbed this opportunity with full force. Further, despite a lackluster 4QCY06, the fundamentals seem to be improving. As per reports, sales seem to have been growing at a good rate and margins, despite the current inflationary environment, also seem to be on the mend. Add to this the fact that the recent low price translates into an attractive dividend yield and there are enough reasons for investors to remain upbeat.
The next two spots on the list have been occupied by pharma majors, Sun Pharma (SUN.BO, news) and Dr Reddy's, both of whom have logged in growth rate in the region of 8% during March and relatively safer bets in the current inflationary environment. Dr. Reddy (REDY.BO, news) is one of our top picks in the pharma sector and we believe that the company's focus on a stronger product flow in the US, growth in Betapharm, custom manufacturing business and other core businesses will be the key long-term drivers. Further, the formation of Perlecan Pharma will mitigate the risks and costs associated with clinical development of the molecules, consequently leading to an improvement in its margins going forward. With Sun Pharma also announcing to spin off its research arm into a separate company, investors seemed to have also cozied up to Sun Pharma as this will lend more stability to its earnings going forward. Moreover, with the company planning to sink Rs 3 bn into research activities over the next three years, the long-term prospects look promising indeed. However, valuations from a medium term perspective do not look too enticing.
The much leaner looking Zee that has also edged higher by around 8% rounds off the list. The appreciation could be the consequence of a lot of positive buzz surrounding the channel in recent times. The most prominent being the fact that with a quantum jump expected in satellite TV audiences, major channels are gunning for advertisement rate hikes in the region of 30%. With the NRS 2006 showing a 12% jump in cable and satellite homes over the previous year, good times seem to have arrived for broadcasters like Zee. Interest in the stock also seemed to be the consequence of the fact that the volume and advertising spends of HLL, one of the biggest advertisers in the country, across the Zee network have increased by 15%-20%. This could be viewed as an endorsement by HLL of the growing popularity of Zee. Thus, with both advertising as well as subscription revenues on the rise, things are indeed looking up for Zee.
While we do analyse the top five stocks on a monthly basis, it should be borne in mind that we consider these reviews as halts or stops in our journey of long term investing and indeed not the final destination. In other words, we don't believe that churning one's portfolio every month is the best form of investing, unless made necessary by some unforeseen circumstances. History suggests and we also believe that investing in fundamentally strong companies at reasonable valuations and with a long-term perspective in mind outperforms all other styles of investing and this should indeed how one should one look at equity investing.
