Take 21,206 and 21,321. There may be very little difference between the Sensex levels in January 2008 and the highs breached last week. But that is where the similarities end.

The stocks and sectors that have led this bull market are vastly different from the ones in 2008. Fundamentals underlying stock prices are hardly the same either, with economic growth at a low and corporate profitability slipping.

Unlike previous rallies, large-caps have powered almost all the gains and small- and mid-cap stocks have been missing in action.

Comparing the bull market of 2008 with the one in 2013, there are four ways in which this one is completely different. These trends hold the key to your investment decisions if you want to join the party now.

Consumer-facing Sensex

If there is one change that best captures the churn in sectors and stocks in this bull market, it is ITC replacing Reliance Industries as the top Sensex stock. Between January 2008 and now, ITC’s stock price tripled, propelling it to the top slot in both bellwether indices in 2013.

ITC now has a weight of 14 per cent in the Sensex, up from 6 per cent in January 2008. With the Hindustan Unilever stock rocketing too, the FMCG sector’s weight in the Sensex climbed to 15 per, against 7 per cent in 2008.

For the past five years, domestic consumption has been robust, driven by strong rural demand and government programmes, and premium products. In contrast, industrials have been battling a poor investment cycle, execution hiccups and regulatory issues.

Consumer-facing sectors have thus fought their way to the forefront, pushing back the industrials. The auto sector’s weight in the Sensex climbed sharply. Stock prices of Maruti Suzuki, Mahindra & Mahindra and Tata Motors have gained 64 and 179 per cent between 2008 and now.

Reliance Industries however, lost its top spot in both the Sensex and the Nifty. Reliance group companies (Mukesh Ambani and ADAG combined), in fact, have seen their combined weight in the Sensex plunge from 20 per cent in 2008 to 8.6 per cent in 2013. .

Sensex holding has also turned more concentrated now, with 10 sectors making up the index. Back in January 2008, the Sensex represented a dozen sectors.

Cement, which had a 4 per cent Sensex weight earlier, is now missing. With the exit of DLF last year, the realty sector no longer has any representation in the index either.

While oil & gas had the second highest weight in 2008, that spot is now taken by software, with an 18 per cent weight.

The only stalwart is banking and finance, with its weight remaining at 22-23 per cent. The Nifty too, saw a similar churn in index weights.

FIIs tighten hold

In this bull market, promoters have sold stakes while foreign institutional investors have tightened their grip. BSE 500 companies had promoters holding 56 per cent of their market capitalisation at the start of 2008.

Due in part to the SEBI ruling on minimum public shareholding and to debt troubles making promoters part with their shares, promoters have loosened their grip. Their stake in listed stocks is now 49 per cent. Agro Tech Foods, AstraZeneca Pharma, and Dewan Housing are some stocks where promoter stakes dropped over 10 percentage points.

And it is FIIs that have done most of the buying. They now have a stranglehold on the market. In the BSE 500, FII stake jumped to 20 per cent by September 2013, up from 15 per cent in 2008. In the Sensex and Nifty, FII holding is even higher at 22 per cent. Stocks such as Lupin, Hindalco, Power Grid and DLF have seen a rise of over ten percentage points in FII holdings in the last five years.

But retail investors haven’t added to their stakes in the leading stocks, their holdings remain flat at 8 per cent over the five-year period. Nor did mutual funds do much buying -- their holdings being flat at around 3.6 per cent.

The exception to this trend is the small-caps. The BSE Smallcap index did the opposite, with promoter holding nudging up by a whisker at 54 per cent. FII stakes dropped to 8.7 per cent by September this year (14 per cent in 2008). Retail holding climbed to 18 per cent from 13 per cent.

Large is good

The Smallcap index, in fact, has been a mute bystander in this bull market, after partying madly in 2008. The index is still 56 per cent below its high of January 2008.

Three-quarters of the index constituents are languishing below their 2008 levels. The lack of positives in the infrastructure sector burdened many a stock. IVRCL, Punj Lloyd, NCC, Simplex Infrastructure and GVK Power & Infra are over 90 per cent below their 2008 levels. Stocks of troubled companies such as Educomp Solutions and Kingfisher Airlines too, trade at less than a tenth of their 2008 levels. Other stocks which haven’t recovered include 3i Infotech and Bajaj Hindusthan. The BSE Midcap index isn’t much better off either, down 38 per cent from its 2008 high.

On the valuations front, the gap between the mid- and large-caps has widened between January 2008 and now. Back then, the Sensex was at a PE of 23 times. The BSE Midcap index was just below this at 22 times (according to Bloomberg data).

While the subsequent fall of 2008-09 increased this gap, the market pull-back spurred mid-cap valuations to catch up. By December 2012, the BSE Midcap index was at a PE of 22 times, while the Sensex was around 17 times.

But the Midcap’s 12 per cent drop in the year so far and the Sensex’s 8 per cent rise has reversed this. The Midcap index’s PE is now at 13 times while the Sensex is at 18 times.

Lower valuations

One bit of good news is that while the Sensex itself may have climbed back to its 2008 peak, its PE multiple hasn’t. The current PE of the Sensex, at 18 times, is below the 22 times in January 2008. But a look at the earnings picture in the four quarters prior to each high doesn’t do much to support optimism. Revenues and profit growth now are a far cry from the growth then. For the past four quarters, revenues and net profits for Sensex companies are up 11 and 12 per cent, respectively, over the year ago.

But in the January-December 2007 period, the run-up to the previous Sensex high, these companies clocked a collective revenue and earnings growth of 34 and 27 per cent, respectively. Net margins too, were 14-15 per cent compared with 11-12 per cent now.

The earnings picture for the broader market is also dismal. Net profits have grown a dismal 2 per cent in the trailing 12-month period. In stark contrast, revenues and net profits expanded 22 and 28 per cent, respectively, in the January-December 2007 period.

Companies struggled with higher cost structure, waning demand, rising interest burden. Excluding banks and finance companies, the raw material cost-to-sales ratio is now higher by two percentage points to around 49.8 per cent. Similarly, interest outgo eats up around 3 per cent of sales now, against 1.6 per cent then. Depreciation too, is higher. As a result, profitability has taken a hit — net margins are now at 8 per cent, compared with 12 per cent earlier.


(This article was published on November 9, 2013)
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