Commodity based stocks in the Indian Sensex By Dr. Bobby Srinivasan and Dr. Sudhakar Balachandran

November 27, 2015 | Posted by bobbysrinivasan << back to blog

The recent drop in the global commodity prices have done untold damage to the commodity based securities and which made the shareholders loose complete faith in the market price discovery process. One way of looking at it is to look at the net worth of such companies and how it got annihilated over time. A sample of such companies will help the reader to understand the issue better.

Name of the Company	Net worth March 2015	Net worth March 2001
Suzlon Energy	-7316 Crores	6528 Crores
Visa Steel	-285 Crores	350 Crores
Shree Renuka Sugars	-2343 Crores	1882 Crores
Shah Alloys	-709 Crores	-178 Crores

A business line analysis shows that out of 3133 listed companies as many as 285 had a negative net worth towards the end of the fiscal year 2014-15. One need to ask the question what is happening to Indian Business environment: We talk about above 7% of economic growth and yet nearly 10% of companies listed in the exchange have negative net worth and hence near bankruptcy. The following observations will be quite useful to the retail investor.

As far as possible stay away from stocks whose market capitalisation is less than 100 Crores. Any small change in the market environment, these stocks plunge in value.
Basically, stick to Nifty stocks, if at all you need to trade. Studies show that 8 out of 10 retail investors loose money in the market. This is not because that they fail to do the basic analysis but a sudden volatility shakes their confidence and they bail out to save whatever is left. For example, on August 24, 2015 due to small amount of Chinese devaluation, Indian Sensex dropped 1700 points in the first half-hour.
Some analysis will help in understanding the commodity based stocks. Shree Renuka Sugars a well-established company saw its market capitalisation plunge. Why? There is a big glut of sugar in the sugar market which has made the sugar prices drop nearly 50% in the futures market. To top it all the rising sugar support prices in India have completely destroyed the company. Similarly the global steel prices are at the lowest price levels ever seen. Finally, the energy prices like the WTI crude has seen a biggest drop in prices in the last 2 years from a level of $ 120 per barrel to $ 40 a barrel.
The global economic slowdown has basically removed any form of inflation. The demand for every commodity from copper, steel, aluminium, iron ore, coal, sugar, wheat etc. have brutally fallen pushing their unit prices beyond recognition.

Finally, the commodity and mining stocks all over the world will be depressed for a very long time, until the global economy recovers and the consumption as a major driver of the economy takes off. There is a hidden opportunity waiting to unfold when things turn around. Whenever it did the price will see new highs. For example, the gold price dropped from 850 dollar an ounce to 285 dollar on Oz in the 1980s, only to touch a high of US $ 1930 two years ago. The message is wait a while and get in the game at the right time.

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