Tuesday, July 31, 2012

India’s best traded stocks is always the ultimate incentive to be in the Sensex

Getting classified as India’s best traded stocks is always the ultimate incentive to be in the Sensex. Concurrently, when a stock drops out of the Sensex, very few have the wherewithal to make it back. B&E commentates on those few which did claw their way back..

While Bajaj Auto made a clear-cut strategic mistake, the case of Mahindra & Mahindra (M&M) was slightly different. The company’s stock had to pay the price of transformation of a functional organisation into a multibusiness group of companies. In 1991, when India opened up to the world, the company limited its focus on few verticals and moved out of the others. It reengineered business processes, brought in new people, invested in information technology, and reduced head count. Despite doing all that, M&M’s stock price underperformed the stock market index. While the Sensex had tripled in 10 years, from 1,193.61 on April 1, 1991 to 3,401.80 January 7, 2002, M&M’s stock had risen just 37.23% from Rs.68.75 on April 1, 1991 to Rs.94.35 on January 7, 2002. Investors no longer believed that they were a blue chip company. Finally, on January 7, 2002, BSE dropped it from the list of bellwether stocks that constitute the Sensex. The management went back to the drawing board and reworked on strategies. Financial goals were set for each business. If a business didn’t meet the target in 12 months, it would have to fold. Result: In just a year’s time, there was a near-total turnaround, with almost every business’s profits and cash flow shooting up. That marked a turning point, and M&M hasn’t looked back since then. Even M&M’s new SUV, the Scorpio, took the market by storm in 2003 and finished the unfinished business. The SUV gamble could have cost Anand Mahindra (who took over as M&M’s deputy CEO in 1991) his reputation as M&M had spent a whopping $120 million on the project; instead, he earned kudos for turning the staid engineering company he inherited into a globally competitive group. In fact, by 2005, the company was so confident that it announced that it would double its revenues and triple its profits by 2008 - and it succeeded in achieving such an audacious target. All this helped M&M regain its seat back in the Sensex on July 9, 2007.

Tata Power is yet another company that was forced to move out of the Sensex on June 12, 2006. But some quick acquisitions (for instance, stake acquisition in Indonesia coalmines) and tie-ups (including Tata Power-Siemens tie up) not only helped the company increase its revenues, but also secure its place back in the Sensex on July 28, 2008. Even the engineering giant Larsen & Toubro (L&T) had once moved out of the Sensex on May 19, 2004, but it was a case of negative investor sentiment toward its stock. Thanks to its management’s prompt response, the company, within four months of its dismissal (on September 27, 2004), made it back to the list of 30 stocks that constitute Sensex.

No doubt, all make mistakes, but some learn from them, and so did these four firms that today stand tall smiling at those who didn’t bother to change with time.



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