A Year On, The Bull Market is Leaving Some Behind

You could say that this is the first anniversary of the current bull market in India. The stock markets haven't had a losing month since January, and for the year as whole, the bellwether benchmarks are up by more than a quarter. In fact, even January was just a blip and we've had almost uninterrupted gains since early September last year. That was the stage, now exactly an year ago, when the markets clearly figured out whatever had to be figured out about the year to come, even though many political pundits were struggling with it till about 10.30 a.m on May 16th.

During this time, the BSE Sensex and the NSE Nifty are both up almost 50 per cent. This is not a small gain. Even in the maniacal history of the Indian stock markets, a gain of 50 per cent in a years' time has occurred just a few times in the last two decades. And it certainly doesn't look like it's over. However, now that the dust has settled a bit, the best news on the stock markets comes not from the fact that the indices are rising but from the stocks that aren't.

For example, in just this few days past, two of the stars of the years gone by--DLF and JP Associates--have seen big drops in their stock prices. In both cases, the markets were reacting to legitimate concerns. DLF has had two shocks. First, the Supreme Court affirmed that it would have to pay the ₹630 crore fine that the Competition Commission had imposed on it for forcing one-sided agreements on customers. Then, the High Court cancelled a large land allotment that Haryana Government had effectively done on its behalf.

As far as JP is concerned, the stock fell by more than 15 per cent over two days, reacting to the news that the promoters' holding company had trimmed stake in the debt-ridden infrastructure and real estate company. There are many aspects of the Jaypee story but the bottomline is that they borrowed too much. Worse, now they are trying to survive by selling off the family silver (hydropower, cement) and clinging on to the garbage (real estate). I guess those who still own the stock decided that if the promoters were trying to get out before the going got even worse, then everyone should rush for the exits.

And these two are just the latest. There are also the likes of Kingfisher, and Bhushan Steel and many others which are roughly in the category. The details are different in each case, but the basic problem is the same. Highly-leveraged and badly run businesses have no way forward regardless of how much optimism there is in the economy and the stock markets. Unlike the feeding frenzies of the past, and unlike the phase immediately after the elections, this rising tide is not lifting all boats.

Such businesses went on a debt binge in the middle of the last decade, and now the chickens are coming home to roost. So far, many promoters have somehow managed to keep things going, but paradoxically, the general upturn has thrown the real basket cases into sharper relief. The decline and death of companies that make big mistakes is a normal and wholly desirable part of capitalism.

Therefore, This is actually very good news. The fact that investors are being sharply discriminating against problem businesses will means that good businesses will get more attention and more resources. The existence of a robust, secular bull run should not be a protective factor for businesses which are in deep financial trouble. Sure, as long as there are markets, many investors will seek to ride the momentum, but some stocks must be left behind.