The best... and worst of times

Krishnan Thiagarajan

THE YEAR 2000 will go down in the history of the stock market as one of the most volatile years, echoing Charles Dicken's famous opening line in the Tale of Two Cities: ``It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness...

The market capitalisation of broad-based and the composite BL-250 index, which closed on December 30, 1999 at Rs 6,51,471 crore, propelled by a sharp surge in FII inflows and a mad rush for technology stocks, soared to a high of Rs 9,00,293 crore by February 22, 2000. But the Nasdaq meltdown punctured the liquidity-driven tech rally and the index plummetted without support from any of the other sectoral indices. Although some of the Old Economy stocks staged a recovery in the second half of the year, it failed to have a material impact on the BL-250 index, which ended the year with a 23.5 per cent decline in value.

Sectoral leaders

After being mauled in 1999, banks and FIs emerged as the biggest gainer of the year, with an appreciation of 13.1 per cent. Even though there was no fundamental change in the strategy of the banking sector during the year, the appreciation in this sector was driven purely by the mergers and acquisitions activity in select banking stocks such as ICICI Bank and HDFC Bank and the year-end fancy for ICICI and IDBI. In the backdrop of the consolidation in the global banking industry, the appreciation in ICICI Bank and HDFC Bank was triggered largely by the acquisition of the Bank of Madura by ICICI Bank in December and TimesBank by HDFC Bank earlier in the year.

HDFC, the housing finance giant, which suffered a huge decline towards the end of 1999, was revalued in the course of the year and FII and domestic institutional interest sparked the huge gains recorded by the stock in 2000. But for these gainers, the rest of the banking stocks such as SBI, Corporation Bank, Bank of India, Bank of Baroda and Vysya Bank ended up in negative territory. However, the banking sector as a whole is not out of the woods yet. On account of less than conservative provisioning norms, the banking sector has been masking at least 20-25 per cent of its non-performing loans as performing assets. And it is only a matter of time and reclassification before restructured and `ever-greened' assets get classified under the non-performing category and the banking sector reveals its true colours. Hence, the worst may not yet be behind the banking and FI sector.

The other major gainers in the sectoral indices were the BL-Commodity Index and BL-Bellwether Index which appreciated by 5 per cent and 3.7 per cent respectively. The appreciation in these two indices was clearly a reflection of the fancy for Old Economy stocks, but the recovery emerged only after the market satiated its fancy for TMT (Technology-Media-Telecom) stocks in the first half of 2000.

The real movers and shakers in the Commodity Sector Index were Reliance Industries and ITC Bhadrachalam Paper. With the petrochemicals and paper industry riding the crest of a bullish wave, the entire sector was re-rated favourably in the year. Although other sectors such as aluminium, copper and steel, the consolidation at the global level contributed to a firming up prices in the first half of the year, but the initial sparks of a rally petered out in the latter part of the year. As the prices nosedived, practically all the major stocks in these sectors ended up in the negative territory during the year.

The cement industry, for all the big-time consolidation which took place last year, fueled further by the acquisition of the 14.4 per cent stake by Gujarat Ambuja Cements in ACC, failed to capitalise on the M&A activity. The relatively sluggish demand on account of the slowdown of the economy and the failure of supply-side price management led to most key cement stocks in the BL-Commodity Index logging declines in the year.

Among the BL-Bellwether stocks, the significant gainers during the year were HDFC, Reliance Industries and ITC. For all the adverse developments that plagued ITC in the last couple of years, it appears to have weathered the storm better than most of the family-run business groups in India.

Sectoral laggards

Both the BL-Agri Business Index and BL-Capital Goods Index were the biggest casualties during the year, shedding 46 per cent and 37.4 per cent respectively this year. The performance of both indices were also symptomatic of the state of the economy. The slowdown in industrial production was highly pronounced and that took a toll on the BL-Capital Goods Index. All the stocks in this index were hammered during the year. The big losers were Ingersoll Rand, Cummins India, Crompton Greaves, Sandvik Asia, BEML, LMW and Thermax. Most of these stocks were at fairly depressed levels, even last year, which effectively means that the hammering was particularly severe this year.

Even though the slowdown in industrial production did not come as a major surprise, the signs of a deceleration in the agricultural sector is a major cause for concern. The erratic rainfall this year appears to have been compounded by the poor management of food storage and distribution. If this trend continues, the country may be staring at a major crisis on the agricultural front. The sharp decline in an assorted range of stocks, ranging from fertiliser, sugar and farm implements, in the BL-Agri Business Index reflected the pathetic state of affairs.

The fancy for the technology sector, which was the dominant theme through 1999, continued to dictate trading interest and investors fortunes in early 2000. Stocks such as Wipro catapulted past the Rs 2,00,000 crore-mark in market capitalisation, while Infosys Technologies crossed the Rs 1,00,000 crore-mark. But after the Nasdaq meltdown in late March/early April when the dotcom craze fell flat, the technology stocks lost momentum across the globe and the bearishness swamped the Indian markets also. However, the most devastating impact of the global trends were felt from September this year, after computer hardware (particularly PC stocks), wireless and telecom equipment stocks fell sharply and a succession of profit warnings from global majors led to panic selling at Nasdaq.

Even though there was no direct linkage between these sector and the software services sector in India, the Indian markets caught a cold, from which there was no sign of recovery at the end of the year. After logging a 306 per cent rise in 1999, the BL-Technology Index ended the year with a 24.6 per cent decline. And that really tells the tech story this year. The earnings performance of Infosys Technologies and Satyam Computers expected early this year may change the story. But that is still in the realm of speculation.