The share price index of tea companies moved down by nearly 27 per cent in the year ended March 29, 1996, in spite of a 11.42 per cent increase in the aggregate pofit after tax. In 1995, though PAT increased by 3.49 per cent, the index declined by nearly 18 per cent.
During 1994, while PAT increased by nearly 17 per cent, index declined with a slower rate of 2 per cent. Similarly, in 1993, while PAT increased by 14 per cent index moved down by 15 per cent.
So far so good. In the previous year, the index went berserk. When the PAT rise was only 9 per cent and when a decline or stagnation in the share index would have been normally expected, the index for the group skyrocketted by 154 per cent.
Thus, barring 1995, the share price index of ten companies moved at opposite direction with its fundamentals since 1993. Only in 1995 it moved at the same direction.
With decreased PAT growth index also declined in that year. It is also clear that the 1992 aberration was caused by exogeneous factors and had little to do with fundamentals.
Share prices of almost all the selected 10 tea companies appreciated during March 31,1992, as per the Bombay and Calcutta stock exchange quotations. But on March 31, 1993, the prices stood far lower.
During the same period in the next year barring Williamson Magor, all the selected companies displayed substantial gains. But one should remember that, during that year the Bombay Stock Exchange 30-share sensitive index also reached its peak due to exogenous factors. Surely this was no handiwork of fundamentals.
McLeod Russel registered a significant growth on all fronts from 1992-93 to 1995-96, except a drop in export growth and PBT growth in 1993-94 and 1992-93 respectively (see Business Standard, July 17,1996).
The McLeod Russel scrip registered the heaviest depreciation of 41.54 per cent between March 31, 1995 and March 29,1996. It had appreciated by 155 per cent, 42 per cent and 18 per cent during fiscal 1992, 1994 and 1995 respectively, but suffered a depreciation in 1993.
The appreciationof its share can be said to relate to its better financial performance. In 1995-96, however, when net profit increased by 60 per cent, the scrip depreciated by nearly 42 per cent.
Brooke Bond Lipton saw an acceleration of PAT growth in 1995-96, while Tata Tea saw an acceleration in its sales export growth. But both companies witnessed a depreciation in their scrip values between March 31, 1995 and March 29,1996.
Similar association can also be found in the ease of Harrisons Malayalam, Warren Tea, Assam Frontier and Williamson Magor, despite significant increases in their net profit during 1995-96, share various slid.
Only the average growth of earning per share (EPS) and price earning ratios (P/E) of the selected tea companies commesurate with the aggregate movements profitability ratios.
From 1993-94 to 1995-96, profitability ratios of PBT to sales and PAT to sales of the selected companies registered a continuous decline and hence the selected companies saw a continuous eroson in their EPS and P/E ratios during the same period.
It is true that EPS and P/E have direct relation with equity base and PAT. If PAT increases and equity base remain same EPS and P/E will increase with the increase of scrip price and if equity base increases both will fall, inspite of increased scrip price.
But many analysts feel that profitability ratio is a good fundamental tool to measure the strength of scrip as it has direct co-relation with EPs and P/E ratio.
They also opine that if the P/E ratio of a scrip remains below the average P/E of the industry group it belongs and if its EPS rises with its profitability ratio, then that scrip has a strength to appreciate further.
The equity base of George Williamson remained at the same level throughout the period under study. Its EPS and P/E improved with the improvement of PAT ratio sales.
Similarly, Harrison Malayalam and Warren Tea kept their equity base at the same level since 1993-94, their EPS and P/E improved with the improvement of their PAT profitability ratio. (Table B and Business Standard, July 17,1996).
The price movements of these companies' scrips apparently showed an irrational behavious, it can be said that these scrips have strength to improve further.
