Tuesday, July 31, 2012

The Sensex, change is the only constant factor

At the Sensex, change is the only constant factor. B&E presents a quick analysis of some new behemoths, those whose positions are under threat & some potential new entrants

Amongst the other strong newcomers are names like TCS, Bharti Airtel, NTPC, HDFC Bank and Sun Pharma. TCS is another interesting tale. The rise of IT exports from India did help it become a part of the Sensex (joining the likes of Infosys and Wipro) starting June 6, 2005, but it was its unique focus on better cost and profit management (to make management more efficient it is the only Indian IT firm to deliver fragmented IT services, and use earned-value based profit centres for evaluating performance and a fixed-cost project delivery model which allows projects to get overloaded by 10-15%) that has made it the current darling of investors. While ONGC has become a case study of how to overcome successfully the declining production of oil and natural gas by timely investments on offshore explorations and technology upgradation, despite having stayed away from an integrated model (a regular feature of big oil companies), there are two firms which rightly deserve their place in the Sensex for having reflected the growth of India in their respective sectors – Bharti Airtel (telecom) and Sun Pharmaceuticals (generic drugs). While Bharti’s rise in mcap was accompanied by its sustained growth in subscriber base (becoming the 5th largest mobile operator in the world in terms of customer base), for Sun Pharma, it is the efficiency factor which makes heads turn – the company’s profit margin at 0.79 is the highest in the industry, higher than the top three drug sellers in India - Ranbaxy’s 0.32, Cipla’s 0.22 and DRL’s 0.26. Last year, it was India’s 10th largest drug seller (sales of Rs.19.33 billion), but the most profitable (bottomline of Rs.13.84). Investors love profits. Sun Pharma is proof. While speaking to B&E about Sun’s arrival on the Sensex stage and creation of wealth, Uday Baldota, Sr. VP, Sun Pharma, says, “Being known as a company that features strongly in the Sensex is not very critical for Sun. But we work towards maximising long term shareholder wealth.”

There are however some new entrants which stand in danger of being removed from the Sensex (based on the Scrip Selection Criteria), if the list is refreshed as of date (as on September 9, 2011). Some of these names include the likes of DLF, Maruti and JP Associates. While the fortunes of DLF and JP Associates are dependent on the vagaries of the realty market, that a sword dangles above the neck of Maruti is an outcome of the slowdown in the auto sector that began in Q2, 2011. When B&E questioned Mayank Pareek, Managing Executive Officer Maruti, on the weakened sales which has got investors worried, he replied, “We cannot mindlessly target volumes and compromise on profitability. We are a Sensex company, and it is our duty to keep the shareholder interest in mind.” Another element to watch out is the potential list of companies that may enter/reenter the Sensex list. And names like IOC, NMDC, Axis Bank, HZL, MMTC, GAIL, SAIL, Axis Bank and Nestle, are the favourites in this regard. Going forward, the transformations will continue. Some will waffle, some will come unscathed from the worst of market conditions. And needless to say, a decade hence, the Sensex will look much different. But as in the past, there will be new faces, those which radiate calm in the stormiest of business cycles. For panic only destroys investor faith.



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