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Bucking the downtrend

Rakesh Rai and Sameer Bhardwaj     November 28, 2008

The market mayhem between 1 January and 31 October this year brought down stock prices to unthinkable levels. The benchmark indices fell by 53% and individual stocks by a higher margin. However, some stocks did manage to rise during this painful period. We present seven such stocks that bucked the trend. Most of these stocks rose by 2-6%, the only spectacular exception being Richa Industries, which shot up by a whopping 130%. How did these companies manage to outperform the market? While some stocks are in relatively ‘safe’ sectors such as FMCG and pharma, others found favour with investors because of factors like consistent performance or takeover possibilities. It may not necessarily be a good time to buy these stocks, but their performance may offer some lessons in stock-picking for the investors.

1. Look for market leaders. Dominant ones can also be price leaders
For companies like the Hindustan Unilever (HUL) and Hero Honda, a dominant market share means established distribution networks and strong brand recall, which are critical in the areas they operate in. This is especially true of the FMCG sector, where there is little differentiation in products and it is difficult for a company to stand out in the crowd. “High market share enables a company to get better terms of trade. It probably has economies of scale and can be a price leader,” says Rajat Jain, CIO, Principal PNB Mutual Fund.

The ability to maintain margins has been another major positive factor for these companies. While Hero Honda managed to control its costs even as metal prices shot up, HUL was able to pass on its higher input costs to consumers and still retain the market share. The measures taken to cut costs will benefit both the companies as input costs have already started coming down due to the fall in commodity prices.

Risk: Market share dominance helps only if considered in tandem with performance.


» Market share in laundry 38%, personal wash 50%.
» Sustained margins by raising prices by 5–15%.
» Falling commodity prices likely to improve margins.
» Healthy growth projected in soaps & detergents (26.3%) and processed foods (34.9%).


» It increased its market share from 39% to 43%.
» Its stronghold is entry-level bikes, which do not depend much on availability of credit finance.
» It managed to control its costs even as the raw material costs were rising.
» The meltdown in metal prices will help the company reduce costs and improve margins.

2. The companies that cater to high-growth sectors are insulated from a slowdown
While the pharma sector has been relatively insulated from the market meltdown, companies like Sterling Biotech have had an added advantage. The company manufactures gelatins that are used for making hard- and soft-shell capsules, vitamin encapsulation, and tablet binding for the pharmaceutical industry. This means when the pharma sector as a whole is doing well, such companies are assured orders. Sterling Biotech also saw a sharp increase in its standalone net profit for the third quarter ended September 2008. During the quarter, the profit of the company rose 22.91%.

Risk: The companies catering to just one sector may be prone to sectoral downturns.


» The company supplies to other pharma companies in the US and Europe.
» With a greater preference for capsules, gelatin manufacturers like Sterling stand to benefit.
» It has had a sharp increase in net profit for the third quarter ended September 2008.
» It has raised funds through GDRs and promoters are open to gradually diluting stake to raise funds.

3. Consistent performance is generously rewarded by investors
The companies that have been consistently beating market expectations and have established a strong foothold in domestic and global markets are considered safe bets. One such compay is Lupin Pharmaceuticals. The company is a market leader in seven of the 20 products it markets in the US. During the last couple of quarters, Lupin has made a series of strategic global acquisitions in Germany, Australia and South Africa which could give it a toehold in some of the most promising generic markets in the world. “We expect the benefits of these acquisitions to start becoming visible over the next few quarters,” says Nitin Agarwal of SSKI.

Risk: Consistent performance also raises investors’ expectations and even a slight deviation from the expected results may affect the stock price.


» It has expanded aggressively in global markets through acquisitions and marketing tie-ups.
» Its margins have improved despite sharp rise in expenses from consolidation of acquisitions.
» As aggressive investment phase tapers off, this will help improve the margins further.
» The company has consistently beaten analysts’ expectations.

4. Dividend yields lend safety to the stock; pedigree adds stability
Though dividends have little meaning when the markets are galloping, in times of a bear phase, dividend stocks such as GSK Pharmaceuticals offer a certain margin of safety to investors. GSK Pharma has been consistently rewarding its shareholders with high dividends. Its dividend payment per share has jumped by over five times to Rs 36 per share from Rs 7 per share five years ago. The company has also continued to do well compared with its peers and is expected to see good growth once it starts introducing new patented products. Another advantage for GSK is that while the Indian subsidiaries of most global companies have restricted themselves to selling their parents’ patented products, GSK has ventured into branded authorised generics and in-licensing of products, like any other Indian generic player. “The company remains fairly insulated from the global credit environment being a focused domestic pharma player with strong liquidity in the balance sheet,” says Bhavin Shah of Dolat Capital.

Risk: High dividends also mean going slow on expansion. Good pedigree works when there is a crisis, but in the long run, it is the performance that counts.


» Patented product support from parent company. GSK expects that by 2010, 10-15% of its revenue will come from patented molecules.
» The company functions like a generic player and is not restricted to selling patented products.
» It de-risked its business by reducing emphasis on price-controlled products and focusing on highgrowth mass-market products.
» It is conservative in its finances and is debt-free.
» It has consistently paid high dividends.

5. Small-caps can outperform. Those on takeover radar can be rewarding picks
Investors are usually warned to stay away from mid- and small-cap stocks as they tend to be very volatile and vulnerable to sharp declines. But even in this space, there are companies that are doing well. Also, share prices jump on rumours of takeovers and mergers. This, however, can be risky because not only is it difficult to verify such rumours, but these stocks are also not actively tracked by analysts. So, getting indepth information can be difficult.

Risk: Investing in small-caps is risky unless you have solid information on the stock.


» Export house status from Ministry of Commerce.
» Rupee devaluation boosted export revenues.
» Steady domestic clients (Arvind, Reebok, Adidas).
» Diversification in pre-engineering buildings.


» A Mumbai-based company has been acquiring shares of the company.
» Over 30% share of branded basmati rice market.
» It has entered growth areas like frozen foods.

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