Doomsday Gain

o news may be good news in life but bad news can be better when applied in the stock markets. The prophets of doom drive stock prices down, some times to an unreasonable extent, when adverse news about the company hit the headlines. In the panic selling that occurs, enough opportunity exists for the savvy investor to take a position at the right time. When the situation becomes clear, in most cases, the overreaction is evident and the stock gains value and when the worst is past the rise in value can bring windfall gains.

Reliance is probably one of the best examples of this phenomenon, where the company has emerged unscathed from all the controversies that have been dogging it and topped a year of relatively good performance with a bonus that has thrilled the market. The exercise, however, is not as easy as it sounds and timing is of paramount importance here. The gains that would result in a successful gamble well justify the risks involved in this investing game. A recent example is the Smithkline Beecham Consumer Healthcare scrip, which plummeted from Rs 234 (price adjusted for bonus) in February 1997 to Rs 180 in less than a month. If a gutsy investor had entered the scrip at that level and exited at the current price of Rs 275, he would be laughing his way to the bank.

 

There are certain factors that that need to be kept in mind as a preamble. As mentioned earlier, risks are very high and this game is not for the weak hearted. The other is the credentials of the company in question. Only companies with strong financials, operations and a sound management fit the bill for contemplating investments in a crisis situation. Investing in MS Shoes after the scam broke out just because the share price fell drastically is just not done.

Again, the event should be company specific and not across the industry as in this case the effect will be felt across the industry and share prices too will be accordingly affected. A change in the excise structure for cosmetics and toiletries will affect all companies in the sector, the effect of which is seen on all their stock prices. But, the consequences of a huge excise duty penalty on a company is isolated. Similarly in the case of Intel, when a bug was detected in their new chip, the scrip price did slip but rebounded with remarkable alacrity.

The key to investing is the assessment of the implications on the stock fundamentals. Is the event affecting the earnings of the company. In the case of Reliance, for example, the switched shares' controversy could not in any way have affected the core operations of the company. In retrospect, the fall was more an outcome of sentiment. If only the image of the company is dented by the happening, this is another sign to watch out for.

Again, the extent of and the time frame in which the price falls should be factored in. Does paying a 5 per cent royalty on Horlicks justify a fall from Rs 235 to Rs 180 in less than a month's time for a stock like Smithkline Beecham Consumer Healthcare?

Another friend is uncertainty, which helps determine the timing for investing. . When only a hazy picture is available of the situation, and news reports keep painting a gloomy scenario, a perfect climate is created for a price crash. Timing the investment decision correctly is the most crucial, and also difficult to pinpoint across the board. But, in most of the cases the best timing seems to have been the stretch of time where the price tends to move sideways for an extended period of time. This period is a sort of a cooling off period in which no further shocks occur. The market is usually waiting for one positive signal for the stock price to be sent shooting up.

Some warnings are also in order. If the impact is more adverse than expected the consequences can also be very disastrous. The best option here is to book losses and lick one's wounds. Another aspect which was discussed earlier in the timing is the long slumber that the stock prices go into can mean waiting anywhere up to a year or two before paying off. In the interim period till the controversy blows away, events with very little adverse implications can push the stock price down further.

So, keep a look-out for stocks that meet these parameters and happy investing. Keep those sorbitol tablets handy, just in case.

Cipla

The Cipla story begins in June 1995 when reports first appeared shocking investors into panic as only 1.5 per cent of the rights issue was subscribed to. The Rs 99.95 crore issue was at a premium of Rs 660, and the market price then was quoting lower. The crisis was caused by the promoters' renunciating their rights in the market. The underwriters refused to honour their commitments saying that the promoters did not subscribe to their own entitlements.

The swift fall in the stock price was further precipitated by the company declaring a lock-out in the Vikhroli plant in the last week of June. From Rs 490 in the first week of June 1995, the scrip price had fallen to Rs 330 in July 1995. This happened in the backdrop of good results for 1994-95 with a 22 per cent growth in sales and a 74 per cent rise at the net level.

The fundamentals of the company were never in question with the company then being the third largest pharmaceutical company in the country after Glaxo and Ranbaxy. The uncertainty was only with the influx of funds linked to the honouring of the underwriters' commitments. The letter of offer had indicated that the promoters may not subscribe to their rights entitlements.

The issue dragged with Sebi issuing show-cause notices to the underwriters. It also went to the courts, where the high court issued a stay on the company utilising the funds which was vacated later. All along, the company was posting good results, and turned in good performances for the six months ended September 1995 and the year ended March 1996.

In this period, after November 1995 the stock price rose a shade and moved sideways indicating a return of interest in the stock.

This continued till August 1996, when the BSE refused listing to the rights shares and the price fell. In September Cipla overtook Ranbaxy to become the number two pharmaceutical company in the country, and another excellent performance in September 1996 later, the scrip never looked back. In February 1997, SEBI cleared the listing on the BSE.

Smithkline Beecham Consumer Healthcare

This scrip stands out as not only being the latest in this category, but also took the least amount of time to rebound. It seems to be a clear case of attractive valuations. The event though affecting earnings potential directly, is not perceived as enough to justify such a steep fall in the stock price.

The report that SBCH was planning to pay a royalty payment on the sale of Horlicks to the parent was reported in the first week of February 1997. SBCH was contemplating a payment of 5 per cent of the sales on the Horlicks brand. The brand contributed to about 75 per cent of the turnover and would mean a substantial outflow for the company.

A stunned market which was miffed with the growing MNC culture of growth through 100 per cent subsidiaries dumped the stock. The price slid from about Rs 230 to Rs 180 in no time. About a week later came the results for 1996-97 which were good with the net profit rising 30 per cent over the previous year. The stock price hardly blinked.

Further reports appeared that Eno was being transferred to Smithkline Beecham Asia Pvt, the 100 per cent subsidiary of the parent company.

The first major blip came in March 1997 when the company announced a 3:5 bonus. But, this did not last for long and the news that a new manufacturing facility for making Horlicks was being implemented through SBAP did not help sentiments, and the scrip moved sideways till May 1997.

This was the cooling off period for the scrip, with no further negative news cropping up. Ever since then, the scrip has been rising steadily, crossing the price at which it was trading before the news broke out, and is quoting at around Rs 280 now. The precise reasons for this will be known once the results for the half year ended June are out.

ITC

This cigarette giant still leaves the stock market gasping for breath with its antics. A trader's delight, this stock also has borne out the above theory remarkably well (see chart: ITC).

The controversy erupted over the alleged FERA violations which led to the enforcement directorate and other agencies swooped down on the company and its officials. The share price fell from Rs 322 in the last week of October 1996 to Rs 240 in November 1996. This is another case where the company's operations itself were sound, though there had been lapses elsewhere. The management of the company too had come under a cloud following the controversy.

The stock price is quoting at above Rs 500 now.

For now, the market seems to have discounted all that. While good performance for the half year ended September 1996 failed to cheer the market, the scrip had already begun moving up in the typical phase of cooling off and expectations of a good performance for

1996-97. The results saw its net profit go up by 31 per cent to Rs 340 crore.

It has announced an investment plan of Rs 1,900 crore, of which Rs 800 crore is towards expansion and modernisation of its units. There is some uncertainty yet over its exposure to ITC Classic, where recently reports suggested that ITC would be required to pump in Rs 200 crore. The share price fell marginally after that, but has recovered since.

Reliance

The saga of the fall and rise of Reliance began with the private placement to UTI in October 1994 at a price of Rs 385. Since then this scrip too has been dogged by one controversy after another, and the scrip price slid to a low of about Rs 150 in January 1996. In August 1995, Sebi's implication of Reliance's link with the players in the share switch saw the share price plunge further. Here again, the controversy itself did not affect the company's operations even indirectly and mere market sentiment led to the fall in the scrip price.

It has been commissioning its planned capacities one by one, and in 1996-97 seven world scale plants were commissioned at Hazira to add over 3.4 million tonnes per annum taking the total installed capacity to 6 million tonnes.

Since the announcement of its half year results for September 1996, the price has been moving up to the announcement of the full year results for 1996-97 which also emerged above expectations. The rise ever since has culminated in a fitting climax with a 1:1 bonus which was beyond market expectations. The price is nearing its October 1994 level and it would be interesting to see if it can breach that level. Though the scrip price has not reacted much after the bonus, this week should see some interesting happenings in this counter.