Regulatory changes,
corporate greed and market pressure can be triggers as well as dampeners for
stocks
For investors, patience can
be a virtue as well as a pitfall. How fortunes can change within days was on
display in the run-up and after the roll-out of the goods and services tax
(GST). Fertilizer and agro-chemical stocks had rallied on a favorable policy environment
triggered by Union Budget 2017-18. The mood dampened when GST of 12% was
applied on fertilizers and 18% on inputs. Realizing the misstep, the GST
Council reduced the rate on fertilizers to 5% a day before the implementation.
ITC surged as the 28% tax imposed on cigarettes was slightly lower than the
burden in the earlier regime. Taking note of the unintended bonanza, the GST
Council hiked cess to restore the original structure. Though the stock’s pace
of gain slowed a bit thereafter, it became one of the contributors in fueling
the benchmark indices to new highs. Investors who booked profit in fertilizer
stocks factoring in the adverse effect of the new GST regime would have lost
out on further appreciation. Buyers of ITC would have been slightly more
fortunate as the conglomerate passed on the increase in the levy to the
consumers. Investors in pharmaceutical stocks are all too familiar with the
feeling of sinking or getting a high on regulatory observations and clearances
to introduce new drugs. It is not only regulatory decisions that can make
long-term investing a hazard and taking short-term positions risky. Ambitions
of companies and large shareholders, too, can bring pleasure or pain.
The current trend of
consolidation is an apt illustration. The HDFC group and the Anjalit Singh
group decided to engage and then break off the proposed tie-up between their
life insurance ventures. Instead of doubts over synergy or share-swap, the
market watchdog’s fear of the combined entity’s clout led to the dissolution of
the vows. Dreams of investors who might have rushed to buy into parent HDFC and
Max Financial, hoping to be part owners of the largest life insurer in the
country, must have crashed after the collapse of the deal.The fate of another
mega agreement between the IDFC group and the Shriram group to work towards
becoming a financial powerhouse will be watched with interest, particularly so
as the IDFC Bank stock moved up, believing the benefits of the transaction.
Even as the merger talks between Bharti Airtel and the Tatas’ telecom ventures
have been called off, two other intended marriages of convenience in the
telecom space—Idea Cellular with unlisted Vodafone and Reliance Communications
with Aircel— remain works in progress, with investors in Idea nor RCom getting
richer despite the resultant enterprises expected to be in a better position to
face Reliance Jio. The dilemma of investors is should they quit or stay put
hoping that the troubled competitors will eventually get a fair chance to fight
it out after tariffs normalize. The power generating sector is another growth
story gone wrong. Of the 15 ultra mega power plants to be set up, no bids have
been awarded for 12. Tata Power, with debt of Rs 14500 crore, wants to sell 51%
stake in the 2,000-MW Mundra UMPP for Re 1 as the cost projections were based
on imported coal. Reliance Power’s Andhra Pradesh UMPP is up but it has
withdrawn from the Jharkhand project as equations have changed with solar power
available for as low as Rs 2.4 kwh as against fossil fuel-based power’s
targeted tariff of Rs 3.
The other uncertainty is the
moves of companies in response to market pressure. A contentious issue is how
much liquidity a company should possess. There is no ideal measurement such as
proportion to net profit, operating profit or sales. Many fret over reserves
dragging down return ratios, while some prefer capital expenditure through
internal accruals. Several investors look at the growing pile as an indication
of bonus or higher dividends. A new breed of activists gets annoyed with
promoters for not utilizing the cash for growth. The recent spate of
deleveraging exercises is a testimony to how quickly the mood of the market can
change. The cement sector, where footprints and capacity decide the margins, is
seeing a second wave of consolidation. The first had players bunching up to
gain pricing power. The second phase is seeing focus on core competencies by
those who had entered the space for scale or diversification. Infrastructure
player Jaiprakash Associates is being re-rated as the promoters are correcting
their past mistakes. The DLF group, too, is becoming lighter after selling many
ancillary businesses. At its prime, the north Indian real estate developer was
included in the benchmark index. The stock’s fall reflects the market’s
nervousness with its expensive expansion. The new Real Estate Regulation Act
might prompt a second look. But when?
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