If you are holding on to stocks that haven’t performed in six years, your portfolio needs an overhaul

[Editor: The Hindu, wrote on 29th April, 2014: The work to widen National Highways (NH) 47 road from Chengapalli to Neelambur is likely to be completed by 2nd quarter of FY15. In February this year, the National Highways Authority of India (NHAI) revised the completion date to July, 2014 as IVRCL, the contractor who is developing the road, had made arrangements for funds. It is to be remembered that the NHAI started the works to six-lane the road from Chengapalli to Neelambur and four-lane it from Madukkarai to Walayar in 2010 at a total outlay of Rs.850 crore. K. Kathirmathiyon, secretary of Coimbatore Consumer Cause, says that the NHAI and the Government should initiate measures to help the contractor get adequate funds rather than just extending the deadline for completion of the works. Also, The Hindu Business Line on  6 April, 2014, wrote: Infrastructure companies, for one, often sub-contract work to group entities, or execute projects through joint ventures or SPVs. The actual construction may be taken on by the parent, or it could be the reverse, with the subsidiary or group entity executing a part of the project bagged by the parent. All this results in construction contract charges being exchanged between them. Reliance Infra, IRB Infra, IL&FS Transportation Networks, IVRCL, JSW Energy — all execute projects through subsidiaries or joint ventures. Such sub-contracting, no doubt, gives the parent company greater control over execution and delivers better profit margins to boot. But when the parent derives all construction revenues entirely from subsidiary contracts, as with Ashoka Buildcon, it results in higher risk to operations. If the order book dries up or execution slips, revenues of both the subsidiary and the parent are put to risk. Moreover, Unity-IVRCL-CTG submitted pre-qualification bids in February, 2014, along with Fourteen other teams, for the $4.4-billion Mumbai Metro-Line 3 project, which will entail $2.6-billion in civil work, including potentially complex tunneling through coastal and cultural areas of Mumbai. The tender is scheduled for release by July with the contract to be awarded by January 2015, according to Sanjay Sethi, managing director, Mumbai Metro Rail Corp (MMRC), a fully-owned company of the Mumbai Metropolitan Region Development Authority (MMRDA). Meanwhile, the DIIs have increased their stake in IVRCL Ltd (Rs.14.29) to 0.80% in March, 2014 quarter as against 0.74% in the December, 2014 quarter]

Essel Group might again enter if a NDA
led government comes-up at the centre

29 April, 2014: Long-term investing is considered a virtue in the stock market. But staying invested in a stock perilously close to a total investment washout is foolhardiness. There are several investors out there who are trapped in dud stocks, waiting for that one big rally which will enable a profitable exit. Little do they know, their wait can be endless, as such a rally may never come.

So, if your broker tells you to stay invested in a dud stock you bought in 2008 — towards the fag end of the bull run — he’s probably selling you a pipe-dream. The stock in your portfolio is unlikely to recover if it has escaped market tailwinds over the past year — the 30-share Sensex has gained over 18 per cent since April 2013. 

That premise is, however, not applicable to every single laggard on the bourse; stocks that are trending low purely on account of the economic downturn may see good days, albeit several quarters later. That said, seven out of every 10 stocks that have consistently underperformed over the past six years (from the last bull run to the present) may never recover from their miserable lows. 

“Eight of the top 10 underperforming companies in the BSE 500 have unmanageable debt on their books. These companies have debt-equity ratios of 1.5-3, which is considered pretty high for certain industries. At the most, we’ll have 2-3 companies turning around from this list,” says Siddharth Sedani, vice-president, Portfolio Management Service, Microsec Capital. 

No Gains, Only Pain

If you had invested Rs 1 lakh in Kingfisher Airlines in April 2008, your principal investment would have eroded to Rs 2,354 now. Likewise, the value of Rs 1 lakh invested in companies such as Suzlon Energy, Rei Agro, Unitech, IVRCL and Reliance Mediaworks in April 2008 would have declined to Rs 5,114, Rs 5,584, Rs 6,430, Rs 8,373 and Rs 10,355, respectively. These stocks have washed out over 90 per cent of shareholders’ money in six years.

Investors have lost serious money in 150-odd BSE 500 companies since 2008. But is there any hope for those trapped in these stocks? “There’s not much left in some of these stocks,” says fund manager and market expert Sandip Sabharwal. “Several BSE 500 companies have balance sheets that cannot be repaired. These companies may never turn around to become profitable investments for investors. For sure, these may react to overall buoyancy in markets, but they will never be able to regain 2008 prices,” he adds.

The bigger worry is the huge public shareholding in some of these stocks. Retail investors hold 50-80 per cent of shares in underperformers such as Kingfisher Airlines, Suzlon Energy, Unitech, IVRCL, Punj Lloyd, Bajaj Hindusthan, Alok Industries and HDIL. 

“High networth individuals own a large chunk of these shares. Most bought them in 2007 and 2008, when these shares were considered winning bets. Small retail investors got sucked into these stocks when the first round of price correction happened in early 2008. Another worrying factor is that some of these companies are loosely held by promoters,” says Sedani.

Among the worst underperformers, money managers only expect select banking, infrastructure and commodity-related companies to do well in the event of an improvement in macroeconomic conditions. 

Stock-pickers are hopeful about companies such as Gujarat NRE Coke, MMTC, IVRCL, Rei Agro and Bajaj Hindusthan, while their disapproval is mainly directed at companies such as Kingfisher Airlines, Suzlon Energy and Unitech which, according to them, may never turn around.

Apart from macroeconomic headwinds, poor management quality and corporate governance issues compounded the woes of companies like Kingfisher, Suzlon and Unitech. High interest rates dealt another severe body blow to smaller BSE 500 companies. These companies have always struggled with high leverage and muted cash generation ability. An increase in borrowing rates — by anything over 50 basis points — increases the amount of stressed balance sheet debt by an estimated 50 per cent, say brokers. 

Sectors That Failed

Engineering companies and power utilities have eroded more shareholder wealth than any other businesses in the reckoning. Sectoral headwinds have taken the sheen off companies such as Era Infra Engineering, Lanco Infratech, NCC, GVK Power and Infrastructure, Jaiprakash PowerVentures and Reliance Power. 

However, analysts expect recent policy reforms in road infrastructure and the power sector to come to the rescue of engineering and power generation companies. Policy measures to tackle fuel shortages and the poor health of state power utilities are pointers to the emergence of green shoots in the power sector, says a recent India Ratings report.

Courtesy: Business World