The year 2021 will go down in memory lane as a year which created loads of wealth for investors. It was a year when indices zoomed to record highs and multiplied investor wealth manifold. The growth in indices was fuelled by all the sectors, including broader markets. The bull rally was able to sustain for more than 18 months as the market breadth was very resilient.
The extent of growth in equity markets can be gauged from the fact that of the 500 companies that make the BSE 500 index, 77 percent of the companies generated positive results for the investors. However, remaining 23 percent gained the dubious distinction of being the wealth destroyers in a year when majority of the companies and sectors were defying gravity.
There were 32 companies from the BSE 500 universe that declined more than 20 percent during the year and this includes some of the biggest names who are market leaders in their space.
What went wrong with these companies that they failed, even when the investor sentiment was very positive, their confidence in markets at an all-time high and the year was very generous with the returns?
The reasons for the fall in stock prices of these underperformers include “regulatory negatives, issues related to corporate governance, industry facing challenging times due to COVID, companies unable to sustain growth in topline and bottomline and asset quality issues in case of lenders”, said Deepak Jasani, Head of Retail Research, HDFC Securities.
Other factors that impacted the performance of most of the companies include, supply chain disruptions, semiconductor shortage, high energy prices, inflationary pressure on raw material prices and weak demand for certain products.
There were about six companies whose prices nosedived 40-55 percent during the year, including Ujjivan Small Finance Bank, Strides Pharma, Vakrangee Ltd, Spandana Sphoorty Financial Ltd, Responsive Industries Ltd and IOL Chemicals and Pharmaceuticals.
“Ujjivan Small Finance Bank and Spandana Sphoorty were the biggest underperformers largely because of forced leadership changes and uncertainty about business direction,” said Abhay Agarwal, Founder and Fund Manager at Piper Serica.
A number of other small banks and NBFCs like Bandhan Bank, RBL Bank, City Union Bank, MAS Financial Services and Indostar Capital Finance underperformed because of worse-than-expected earnings and deteriorating portfolio quality.
“The key factor holding back banks is an anaemic recovery in credit demand and the ability to deliver strong core return ratios” said Dhananjay Sinha, Managing Director and Chief Strategist, JM Financial Institutional Securities.
“In the absence of an adequate pick-up in leveraging, runs the risk of NPA resurgence as the regulatory forbearances lapse,” he said. So, more than bad loans, the banking sector requires a sustained recovery in the economy, in which revival of private demand is very crucial.
Another reason for the underperformance of small financial services companies is under investment in digital capabilities and competition from new-age technologically advanced fintech companies which are gaining the market share.
“Investors threw the towel and we do not expect these companies to recover in a hurry as they have ceded market share that will be very tough to get back,” said Agarwal.
Many of large pharma companies like Biocon, Strides, Aurobindo, Wockhardt, Alembic, P&G Health and Jubilant also disappointed investors.
“They had seen their stock price run up in expectation of strong export growth but the pressure on their margins and high competition impacted their financial performance which impacted their stock prices,” Agarwal said.
We do not expect any turnaround here as the margin pressure will remain high driven by high competition, he said.
Hero Motocorp, Varroc and Amara Raja corrected by more than 20 percent as investors questioned their commitment to the rapidly growing (Electric Vehicles) EV ecosystem.
So, what can investors expect from these underperformers in 2022?
Experts believe that some of these underperformers still hold promise and can register a positive turnaround in the next year but many of them will find it very difficult to change direction.
“Overall, we are not very sure if any of these stocks will change direction in 2022,” said Agarwal. To do that, they will need to convince the investor community with performance and show a tangible roadmap to earnings growth, he added.
Mohit Nigam, Head of PMS at Hem Securities, believes that there are few stocks that investors can hold or enter which have not performed well in this year, including HDFC AMC, Hero Motocorp, Jubilant Pharmova, Amara Raja Batteries. “All these have a good business model and proven track record,” he said.
“The prospects of the banking sector and banking stocks are crucially dependent on the efficacy of fiscal measures to revive the demand side,” said Sinha of JM Financial Services.
Experts are of the opinion that rather than betting on a turnaround in the beaten down stocks of 2021, investors will do well to focus on companies that are benefitting from the changing demographics, rapid digital adaption and formalisation of the economy.
So, it is better to stay with the companies that have built their business models around this long-term theme rather than chase turn-around stories.