Futile Measure

As usual, the Securities and Exchange Board of India (Sebi) is missing the point. When an index is based on market capitalisation, a stratospheric rise in a few stocks will in any case skew the index.

Sebi's `suggestion' to the Bombay Stock Exchange to broadbase the 30-scrip Sensex is meaningless. Whatever the weightage scheme chosen, the skew will remain. Perhaps, it will be a little less peaked to the left as the number of scrips increases.

In the Sensex, for instance, the top three scrips (Infosys, HLL, and Reliance) account for as much as 46.60 per cent of the total weightage. Another two scrips, and the top end weighs around 61 per cent.

 

Forget the index, look at the market. As of Thursday, Wipro alone accounted for 16.45 per cent of the total BSE market cap of Rs 11,49,40,178 crore. Three srcips _ Wipro, Infosys and Zee _ made up 27 per cent. The first 12 scrips made up the top 50 per cent, 22 scrips made up 60 per cent. In the cumulative distribution, the top 41, 78, and 189 scrips made up 70, 80 and 90 per cent of the BSE market cap.

That is, the balance 3,057 companies on the BSE accounted for the last percentile in terms of market cap. The Sensex, thus, is the wrong place to begin with.

It was written on the wall that information technology stocks would skew the Sensex one day. Infosys Technologies and NIIT were added to the Sensex in November 1998. A recent Business Standard Research Bureau report said this stock alone contributed as much as 700 points to the near 1,000-point rally between October 8, 1999 and February 8, 2000.

The reality of the surge in Infosys prices cannot be masked by changing the composition of the index. After all an index is just a convenient aggregation.

What the BSE needs to consider is to spilt the market into new economy and old economy stocks. The ground reality is well recognised. Indeed, the BS 1000 (issued with this paper yesterday) captures the paradigm shift in the economy. Have an index of ICE (information, communication, and entertainment stocks) companies, and another one for the non-ICE, traditional economy companies.

That will avoid all the problems that Sebi foresees when index-based futures come around. Investors will have a choice of taking a view on the two economies, without one contaminating the other.

Glaxo India

Glaxo India's results fail to enthuse. Net profit is down 11 per cent to Rs 77 crore, while sales have increased 11.5 per cent to Rs 885.5 crore. The results should not come as a surprise because company executives have been sounding warning bells for some time now.

The company says that the industry is facing a recessionary trend which is why the formulations market is growing only at 8 per cent and Glaxo a little above it. However, there are companies that have bucked the trend like Pfizer, for instance, which showed a 23 per cent topline growth. Novartis in the first nine months of the current fiscal has grown a 20 per cent growth.

Glaxo's woes have been compounded by the aggressive generics businesses, where producers offer unimaginable discounts to push products. The company's imported bulk drug Ceftazidime also was at the receiving end of a customs duty hike, analysts said. Operating margins were impacted as a result. Operating margins collapsed 4 per cent to 7 per cent in calendar year 1999 from 11 per cent the previous year, they said.

The slide in margins is also due to increased promotional expenses. The company went through a marketing structure revamp last year and is increasing its field staff by around 400. Expenses will continue to remain on the higher side this year, too.

The one silver lining on the horizon is the upward revision of betamethasone formulation prices. The company did not launch too many new products last year. In fact 90 per cent of sales continue to come from products over 5 years old.

Glaxo India hopes to change this with more new products coming out of the pipeline in various therapeutic segments.

Sundaram Finance

Credit rating agency Crisil's downgrade of Sundaram Finance from triple-A to double-A earlier this week is a harsh blow for the non-banking finance company (NBFC). Sundaram is the country's fourth largest NBFC, after HDFC, LIC Housing Finance and Tata Finance, with a reported income of Rs 440 crore in the year ended March 1999.

The rating downgrade reflects the dynamics within the NBFC industry. The much promised shakeout for weaker players is already at hand. With the Reserve Bank introducing tough registration norms for NBFCs, the weeding process is over. Now it is a fight between the relatively stronger players.

Crisil's view is that with the elimination of weaker players, the competition in the upper echelons has intensified. "Survivors operate in a highly competitive market with significantly lower profitability margins," Crisil says.

But it is not only about the survivors in the NBFC sector. The real competition now is from banks and financial institutions pushing vehicle loans _ Sundaram's traditional strength. But they not only have deep pockets, but also a relatively wider portfolio of products. This enables them to ride out downtrends in particular products. NBFCs are not so diversified. As a result, the burden of non-performing assets is heavy. Crisil says it expects Sundaram to make increasing provisions, mainly on account of its corporate portfolio.