Crash of Sun TV, SpiceJet stocks underlines the dangers of looking at fast-growing companies while ignoring their political links. Many Indian mutual funds and foreign investors would be affected
Shares in Sun TV and the budget carrier SpiceJet crashed by over 27% and 16% respectively on Thursday, following an expose in Tehelka magazine about the role of Dayanidhi Maran when he was the telecom minister between 23 May 2004 and 15 May 2007.
This underlines the perils of investing in companies that seem to grow easily and fast-but with generous political patronage. The shares crashed on allegations that Mr Maran's family-owned business, Sun TV, received substantial investment from the Maxis Group (which owns Aircel) which picked up 20% equity in Sun Direct. The government approved this investment on 2 March and 19 March 2007. Maxis Group invested a total of Rs599.01 crore in Sun Direct between December 2007 and December 2009.
With the DMK-linked companies in a soup and DMK out of power in Tamil Nadu, a cloud hangs over the immediate prospects of these companies. The stock prices are unlikely to recover soon. Among the mutual fund investors in Sun TV and SpiceJet that would have suffered losses are IDFC Premier Equity, Fidelity Equity, Morgan Stanley Growth, Sundaram Select Midcap, DSP BlackRock T.I.G.E.R and SBI Tax Advantage Series I.
The promoters of Sun TV hold 77%, while foreign institutional investors (FIIs) hold 9.49%, domestic institutional investors (DII) hold 3.06% of the equity, and the remaining 10.45% is with retail investors. In SpiceJet, the promoters hold 38.61%, FIIs hold 11.84% and DIIs hold 15.10% equity respectively. The remaining 35.45% is the retail shareholding.
Clearly, institutional investors have a significant holding in both companies and they will have a difficult task recovering their investments. The main problem is that both SunTV and SpiceJet have strong political patronage which will be undermined by new polticial equations. Analysts believe that with the DMK's arch rival J Jayalalithaa of AIADMK, coming to power as chief minister in Tamil Nadu, and the scam-ridden UPA at the Centre, both Maran-family owned companies will find it difficult to grow.
The AIADMK is already up in arms against the Marans. It has announced that it plans to nationalise the cable TV distribution business in the state, a step that would break the monopoly of Sun TV which has the largest cable TV distribution in Tamil Nadu.
In the past, companies having strong political affiliations have been rejected by investors, in the wake of scams and controversies. These stocks have subsequently underperformed. For instance, the HCC stock crashed by 29% after the company's Lavasa project came under the scanner of the environment ministry for various violations. Investors have been on tenterhooks since. Promoter Ajit Gulabchand is reported to be close to union agriculture minister Sharad Pawar.
Key leaders of the DMK, such as former telecom minister A Raja and member of parliament MK Kanimozhi are already in prison after the CBI arrested them for being a beneficiaries in the 2G spectrum allocation scam.
Although Sun TV gained about 4% and SpiceJet put on a little over 2% in trading today, the allegations against Dayanidhi Maran will make it very difficult for these stocks to recover very much.
(You may also want to read an earlier report on this subject on Moneylife:
'Stocks of companies with political links beaten down'.)
The sugar industry has recorded the highest quarterly net profit growth over the same quarter in the previous year. The farm & farm inputs and the energy sectors have also put up a good show
Among the 29 major sectors (out of 49 sectors) tracked by Moneylife, sugar, along with farm & farm inputs, and the energy sectors, have recorded the highest net profit growth over the same quarter in the previous year.
With most of the results of the March quarter of a number of companies already in, Moneylife analysed the aggregate performance of the 29 major sectors that we track.
Companies in the sugar sector recorded the highest net profit growth in March 2011. So far, 1,214 companies out of 1,300 companies in the Moneylife database have declared quarterly results. Net profit of companies that we include in the sugar sector grew by 190% to Rs692.34 crore, while operating profit grew by 80% to Rs1,462.56 crore.
Top companies in this sector include Parrys Sugar Industries, whose quarter-on-quarter (q-o-q) net profit rose 178% to Rs12.52 crore, and operating profit rose 38% to Rs33.25 crore; Balrampur Chini Mills, whose net profit rose 309% to Rs112.78 crore, and operating profit rose 153% to Rs205.89 crore; Bajaj Hindusthan, whose net profit rose 129% to Rs72.82 crore, while its operating profit rose 121% to Rs317.49 crore; Ugar Sugar Works, whose net profit rose 70 % to Rs30.05 crore, while its operating profit rose 49 % to Rs 56.87 crore; Triveni Engineering & Inds, whose net profit rose 58% to Rs23.53 crore and operating profit rose 13% to Rs57.32 crore.
This level of higher performance has been possible because of the buoyant demand from the consuming masses in the country.
The second-best sector was farm & farm inputs, which notched up a 75% rise in q-o-q consolidated net profit to Rs1,137.88 crore, while the operating profit for the sector for the same period rose 58% to Rs1,708.23 crore. A few of the good performers in this sector include Nagarjuna Fertilizers and Chemicals, whose net profit rose 24% to Rs24.48 crore, while its operating profit rose 16% to Rs120.77 crore; and Jayant Organics, whose net profit rose 252% to Rs2.32 crore, while its operating profit rose 15 % to Rs8.37 crore.
The third-best sector has been the energy sector, whose aggregate net profit grew by 67 % to Rs6,737.59 crore, while operating profit grew by 31% to Rs10,044.73 crore.
Some of the good March 2011 quarter profitability performances came from PTC India, whose net profit rose 142% to Rs33.51 crore, while its operating profit rose 264% to Rs34.34 crore; Gujarat Industries Power, whose net profit rose 125% to Rs81.21 crore, while its operating profit grew 107% to Rs122.81 crore; Jyoti Structures, whose net profit rose 38% to Rs35 crore, while its operating profit grew 18% to Rs84.05 crore; and Power Grid Corporation of India, whose net profit rose 37% to Rs751.12 crore, while its operating profit grew by 16% to Rs1,740.68 crore.
Banking sector net profits have gone up by 9% in the March 2011 quarter to Rs13,808.24 crore—an impressive performance from the giant-sized sector, while operating profit has gone up by 13% to Rs32,941.45 crore. IDBI Bank's net profit rose to Rs516.25 crore (up 62%), while its operating profit rose to Rs1,166.81 crore (up 36 %). ICICI Bank's net profit rose to Rs1,452.11 crore (up 44%), while its operating profit fell to Rs2,304.93 crore (down 4%). Yes Bank's net profit rose to Rs203.38 crore (up 45%), while its operating profit rose to Rs348.77 crore (up 35 %). Bank of Baroda's net profit rose to Rs1,294 crore (up 43%), while its operating profit grew by 19% to Rs1,945.81 crore . Axis Bank and HDFC Bank had net profits in excess of Rs1,000 crore (up 33%).
The auto and cement sectors have done reasonably well in terms of growth in net profits of 26% and 24% respectively. The auto sector's net profits were Rs4,073.73 crore, while operating profits were Rs5,289.83 crore. The cement sector's net profits were Rs2,050 crore, while operating profits were Rs3,928.88 crore (up 17%).
The laggard in sector-wise performance has been shipping—where net profits were down by 87% to Rs49.02 crore while its operating profits were down by 25% to Rs545.40 crore. Although the shipping sector was not profitable, there was one company which achieved net profit growth over the same quarter in the previous year. It was Bharati Shipyard—with a net profit growth of 7% to Rs38.23 crore, while its operating profit grew by 90% to Rs156.57 crore.
RIL’s AGM, slated to take place today, will outline business plans for the current fiscal
The stock market in India is likely to open on a cautious note on mixed cues from the global arena. Wall Street settled mixed on Thursday ahead of the release of the important jobs data on Friday, which will reveal the state of the country’s economic growth. Tracking the US, the Asian pack was lower in early trade on Friday. The SGX Nifty was 15 points down at 5,548 compared to its previous close of 5,563.
Domestic investors will also take cues from Reliance Industries’ AGM to see what the company’s chairman Mukesh Ambani’s plan for the current fiscal will be.
The Sensex and the Nifty opened well below Wednesday’s closing following a huge decline in US markets and weakness in all Asian markets. The Sensex opened at 183 points lower at 18,426 and the Nifty started 62 points lower at 5,530. The indices immediately hit their intra-day lows, at 18,391 and 5,522.
Very weak US data raised questions about future demand for Asian exports as well as the likely impact on economic growth. Apart from a weak ISM manufacturing reading, employment data from ADP showed an increase of just 38,000 jobs in the past month, well below expectations for an increase of 175,000.
But the Indian market showed good resilience and the Sensex and Nifty stabilised after the morning lows and moved up to their intra-day highs at 18,541 and 5,568 respectively. This happened on reports of slowing down of food inflation. Food inflation rose 8.06% in the year to 21 May 2011 slowing down from an annual rise of 8.55% a week ago. The primary articles price index was up 10.87% compared with an annual rise of 11.60% a week earlier. However the fuel price index climbed 12.54% compared with a rise of 12.11% a week earlier. Finally, the Sensex fell 115 points to close at 18,494, while the Nifty fell 42 points to close at 5,550.
Markets in the US closed mixed on Thursday on weak economic data and ahead of the release of the key jobs data on Friday. Factory orders fell in April due in part to weaker sales of motor vehicles, machinery and computers. This apart, initial unemployment claims fell less-than-expected.
The Dow slipped 41.59 points (0.34%) to 12,248.55. The S&P 500 shed 1.61 points (0.12%) to 1,312.94 while the Nasdaq added 4.12 points (0.15%) to close at 2,773.31.
Markets in Asia that were mixed in early trade on Friday were trading lower subsequently, awaiting the release of US jobs data, which will reveal the pace of growth in the world’s largest economy. Shares in Japan edged higher on short covering after falling sharply on Thursday while the market in Seoul was flat as exporters were concerned about the global economic growth. Meanwhile, Japanese auto sales fell by one-third in May, the lowest total for the month since 1968, as car makers struggled to restart production after the earthquake and tsunami that devastated the country in March.
The Hang Seng was down 0.47%, the Jakarta Composite declined 0.32%, the KLSE Composite fell by 0.03%, the Nikkei 225 was 0.32% lower, the Straits Times declined 0.36% and the Seoul Composite fell by 0.12%. On the other hand, the Shanghai Composite gained 0.18% and the Taiwan Weighted rose 0.19%.
Back home, the Reserve Bank of India (RBI) on Thursday expressed confidence that banks would start providing funds to microfinance institutions (MFIs) once guidelines for regulating the sector are put in place.
RBI Deputy governor KC Chakrabarty hinted that RBI guidelines on MFIs, expected shortly, would be in line with the norms announced in the monetary policy. “There will be no surprise in the final guidelines for MFIs,” he said.