SENSEX FALLS 39 PERCENT SINCE JAN, BUT 17 BSE 500 FIRMS BUCK TREND

Ashwin Ramarathinam
Mint

Between 10 January, when the Sensex reached its lifetime high of 21,206.77, and 1 July, the benchmark index of the Bombay Stock Exchange (BSE) has fallen about 39 percent. None of the indices of the 133-year-old BSE, Asia’s oldest stock exchange, has gained during this period.

Except, that is, for 17 stocks in the BSE 500, an index of the top 500 Indian firms by market value, that have bucked the trend. This despite the index, which represents nearly 93 percent of the total market capitalization of the exchange, falling more than the Sensex, some 41.6 percent since 10 January.

A Mint analysis of the performance of BSE 500 stocks during this period shows that Kolkata-based REI Agro Ltd, a consumer goods firm, has produced a 41.53 percent return. It would have done even better but for a 4.95 percent dip on Tuesday, when it closed at Rs1,307a share.

Spice Communications Ltd, a telecom service provider, is the second highest gainer, offering a return of 37.16 percent. It closed at Rs72.35 a share on Tuesday.

Two other big gainers are Ranbaxy Laboratories Ltd and Sun Pharmaceuticals Industries Ltd—both offering at least a 25 percent gain during this period.

Overall, this group of out performers consists of seven pharmaceuticals firms and three firms each in information technology (IT) and consumer products. In addition, there are oil exporting firm Cairn India Ltd, rating agency Crisil Ltd and gelatine making chemical firm Sterling Biotech Ltd.

Analysts are not surprised as pharmaceutical and consumer products firms are traditionally seen as defensive stocks. By definition, a defensive stock is one that tends to remain stable under difficult economic conditions.

Firms dealing with food, tobacco, oil and utilities are often considered to be defensive stocks. They hold up well because demand for such products does not decrease as dramatically as it may in other sectors. However, in a bull market, such stocks tend to lag the rest for the same reason—demand is relatively steady.

The reason behind the rise of IT stocks is the fall in the Indian rupee, which has made substantial declines versus the dollar during this period. Since the bulk of earnings of these IT stocks come from exports, they tend to gain when the local currency weakens as their dollar income goes up when in translated in rupee terms.

While not a single sectoral index of BSE has offered positive returns during this period, the health care index and the IT index have lost the least. The health care index is down merely 1.91 percent and IT index 4.75 percent.

Four indices have lost more than 50 percent. They are real estate (68.23 percent), power (54.11 percent), bankex (53.64 percent) and capital goods (50.45 percent).

All four sectors are interest rate-sensitive and they normally suffer when interest rates go up and liquidity is squeezed in the system.

The Reserve Bank of India, the country’s central bank, has been raising its policy rate and banks’ cash reserve to fight the rising inflation, which is at a 13-year high.

A rising rate dampens the demand for houses and that impacts realty stocks. Banks, too, feel the heat in such a scenario as their loan growth slackens and the value of their bond portfolio depreciates when the rates go up. Meanwhile, both the power and capital goods sectors are capital-intensive and the going gets tough for them when interest rates rise.