THE QUIXOTIC MARKET - FOLLOW IT AT YOUR OWN PERIL

By Ruma Dubey

Sometimes, the market probably shows more maturity, truly befitting its age of 137 years but most of the times, especially nowadays, it behaves in the most strange manner.  If it treats one company miserably for showing a good performance only on the basis of exceptional gains, then why treat another company with great pleasure for the very same gain?

First take the case of Reliance Communcaition or Rcom as it is more popularly recognized. It was the top gainer on the BSE for most part of the day. The company, for Q2FY14 posted an over 6 times (QoQ) rise in its net profit at Rs.675 crore but of this, Rs.441 crore came from a write back. . But for this write back, the performance would have been dull with net profit coming in at Rs.234 crore. Yet, the market has chosen to look beyond this write back and is celebrating the rise in net profit, sans the gain, which has come much beyond most market expectations. What about the high interest outgo, which in Q2 alone was at Rs.676 crore, 13% of the revenue earned? With further rate hike expected from RBI in the coming months, this burden is only expected to go up. Its debt stands at a jaw dropping around Rs.38,000 crore.

So what is the market exactly looking at in Rcom? Maybe the fact that the brothers have patched up and there could be more business coming its way? Or maybe Rcom will work hard in bringing its debt down, which it has been trying to do unsuccessfully for over past few years? Or as some brokerage houses have stated post the numbers, they are going long on the stock expecting the a hike in call tariffs, which in turn will add to its topline. Thus banking on these possibilities and ignoring many other core issues in Q2 numbers, the stock is the top gainer.

In the same breath, take a look at the current top loser on the BSE – Tata Global Beverages. This stock is being punished for inflating its net profit by adding on exceptional gains. The company for the quarter had an exceptional of Rs.92 crore and this is what helped the company end Q2 with a 51% (YoY) rise in consolidated net profit at Rs.180 crore. Net sales rise at 3% (YoY) was muted at Rs.1906 crore. The exceptional gain came in through various sources – profit on sale of property in Bangalore, Rs.86 crore coming in as realized profits and then write off of various other costs, which ultimately left the company with a gain of Rs.92 crore. Excluding this gain, net profit for the quarter would have been down 14% at Rs.81 crore. EPS would also have slipped from Rs.2.80 to 0.91 paise.

But what the market did not see at all was that was the total of the profit it is currently sitting on. If the market was indeed as foresighted as it is made out to be, then how come it did not see the picture  emerging for FY14 which will end up looking very good, exceptional gain or not. Net profit for H1FY14 is at Rs.292 crore and it had ended FY13 with a net of Rs.373 crore. Thus with two more quarters to go, barring any ‘exceptional expense’ the company will actually end FY14 on a much higher note.

The question is – if the market is looking at stocks with foresight, a vision into its future, then how come two companies are treated differently?

Another example – State Bank of India. The largest bank of India declared its Q2Fy14 numbers, wherein net profit for the quarter dropped 35% (YoY) at Rs.2375 crore. Asset quality remains under pressure, with Gross NPA increased from 5.56% in June quarter to 5.64% in current Q2 and net NPA too, sequentially rose from 2.83% to 2.91%. The stock price jumped 3% after the numbers were declared. Why? Because many analysts had expected NPAs to increase much more than what it actually rose. So the market is happy because things are not bad in SBI as it was expected to be. But what about the fact that its recovery of bad loans has slipped 65% (YoY), meaning it is not able to recover as much as it last year.

Thus there are many stocks which behave in direct contrast to their fundamentals, leaving you wondering whether you have interpreted it all wrong. Maybe sometimes we do and sometimes the market is wrong. So what does one do? Follow your instincts and read the financials right down to the fine print. Its OK to miss the bus now rather than get into a bus with a faulty brake and then meet with a fatal crash. Remember, lots of the news which you read is not what it is, many are advertorials of brokerage houses. And statements like "better than expectations" or ".lower than expectations"; who sets these expectation bars to knock down or spike up stocks? So be wary of getting trapped in some random bull run. Financials never lie and always know this eternal truth.