Never say never again

No matter your attitude or mood, stocks have the capability to surprise you by their turnarounds

Every rally and pullback amazes and stuns. Stocks dismissed with contempt spring back and those viewed with awe stumble. Two recent instances confirm that investors should never, never say never again. A few days after the market welcomed its impressive quarterly results, Infosys dragged down the mainline indices by slipping 16% in two days following a whistle-blower’s complaint of financial irregularities. The IT bellwether is up about 9% since Chairman Nandan Nilekani asserted to the NSE that such a possibility is remote due to fail-proof safeguards. Rating downgrades and resignation of three independent directors were the beginning of Yes Bank’s travails. The Reserve Bank of India in October 2018 refused to give the founder-CEO an extension beyond March 2019. The new-gen private bank’s slide thereafter spilled into the open the top manager’s leveraged position. It shed more than 90% before the promoter divested most of his stake but nearly doubled from its low after an NRI agreed to pump in US$ 1.2 billion. The automobile industry captures the dilemma if the worst is over or there is still more pain for a sector. The pile-up of inventory and the resultant production cuts by manufacturers are turnoffs for slowing the growth momentum. Low prices are viewed as an opportunity by the contrarians because the disruption due to the transition to BS VI norms from April 2020 is expected to last for a couple of quarters more before a refurbished industry is ready to roar. Backers of PSUs for the comfort of controlling government stake are in a better place today. Savvy investors recognized that the acknowledgement of bad loans, creation of an insolvency vehicle and consolidation are carefully calibrated steps to the eventual privatization of nationalized banks. The recent Supreme Court judgement that creditors take precedence over operational facilitators in bankruptcy proceedings has fortified those who believed in these lenders. The Nifty PSU Bank index has appreciated 7.6 % from end August, when Rs 70000-crore capital was loaded upfront.

Discerning observers who understood Aramco’s buy of RIL’s 20% stake as a forerunner to the opening up of the oil and gas sector would have felt justified after the government put its entire stake in BPCL on the block. Debt-laden Vodafone Idea and Bharti Airtel were written off after a price war and the Supreme Court’s demand to pay backdated revenues. The  decision to differ the installments payable for buying spectrum in the next round for two fiscal years and principal competitor RelianceJio’s plan to start levying tariffs on voice calls rekindled hope of a second coming. At the same time, a sudden adverse turn by counters that have been creating wealth year after year can shake up complacency. Graphite makers capitalized on China’s clampdown on polluting industries and recovery of user industry steel. Graphite India returned 1,401% and HEG 2,808% in the 20 months till August 2018.The over 80% plunge in Graphite India’s net profit in the latest quarter was a shock but not a surprise as the US-China trade war sparked more than a year ago dampened demand. In fact, HEG had started showing signs of stress in the June 2019 quarter, with the bottom line sliding 70%. The removal of the anti-dumping duty on Chinese imports was a double whammy. Both have shed nearly 70% in 15 months.

 Buying into a company that has been unstoppable so far is as much a gamble as trying to catch a falling star. There is no knowing when overvaluation will burst the bubble or when the bottom will be reached. For Titan, with P/E of about 72, growth-driver gold turned into an obstacle as prices pierced the resistance level. The jeweler has declined 15%, while the mainline index has inclined 3.5% in the past month. Those sticking with ICICI Bank amid mounting bad assets and the Videocon loan scandal might feel vindicated as it has gained about 80% in the near 14 months following the installation of a new CEO and MD. Faith imposed in Indiabulls Housing Finance on its proposed merger with Laxmi Vilas Bank might seem misplaced now as the deal did not get the regulatory nod despite the group divesting most of its real estate assets. It has given up 80% in the ensuing six months. The confidence in Zee, on the other hand, might be bearing fruit as the overhang of pledged shares is disappearing, with the promoters offloading most of their holdings to pay their loan obligations. The many divesting from the NBFC space wholesale after the collapse of IL&FS in September 2018 might be stumped at the resilience of Bajaj Finance, amassing 90% on its October 2018 low even as peers are struggling. To modify the soundtrack of an old James Bond movie, no matter your attitude or your mood, the stock will surprise you.

-Mohan Sule