Going gets tough

MFs find it tough to make a kill in a selective bull market

The Sensex may have gone up 33.56 per cent in the six months ended March 10, 2006, but returns in the average portfolio are not as good, say market players.

Most gains have been in a few stocks, mainly large caps, and in a few sectors such as automobiles, capital goods and, more recently, cement sectors.

Though the broad market is up too with the S&P CNX 500 gaining almost 27 per cent, it has not been as good as the large-caps.

This selective bull market has made it difficult to make money for investors. And one set of investors to feel this pain the most are fund managers.

Though mutual funds have posted decent absolute returns, benchmark indices have performed better over the past six months for many funds.

According to data from Value Research, the average diversified equity fund has either underperformed, or there has been a sharp decline in the fund's extent of out-performance over the past six months compared with calendar 2003 and 2004.

The average diversified equity fund has underperformed the Sensex by 3.34 per cent over six months ended March 10, 2006, compared with a gain of 14.22 per cent and 6.74 per cent at the end of 2003 and 2004 respectively.

Even for one-year ended March 10, the average fund's gain versus the Sensex has reduced to 4.79 per cent compared with 34.98 per cent and 13.32 per cent in 2003 and 2004.

Though outperformance for the average equity fund is 3.3 per cent versus the S&P CNX 500, it is not a popular benchmark. The story for the average tax-saving fund is even worse, as it underperformed the Sensex by 8 per cent in the past six months.

Mutual funds did well in 2003 and 2004 owing to astute stock-picking, especially in the mid- and small-cap category. That was the time when mid-caps were doing much better than the large-caps, which helped in funds clock great returns for investors.

After topping out in September 2005, mid-caps have not kept pace with the large-caps, which is about the past six month period. As a result, diversified equity funds have not done as well.

Though over half the funds have increased their large-caps allocation between September 2005 and February 2006, the market has not been kind to fund managers. With sector calls and stock-picking becoming increasingly difficult, the going is tough for fund managers to beat benchmarks.

Marico: Nihar improves market share

Having acquired the Nihar brand from Hindustan Lever for Rs 216 crore, Marico now commands more than 60 per cent of the Rs 800 crore coconut oil market.

Nihar, which has an overall share of 9 per cent and a share of 40 per cent in the perfumed oil category, would add approximately 10 per cent to Marico's top line of Rs 1,012 crore for FY05.

The Marico stock has underperformed its mid-cap peers in the last three years and has traded at a discount primarily because it had relatively less pricing power and was vulnerable to commodity price fluctuations.

For instance, despite sharp price rises in copra, Marico was not able to increase prices of Parachute significantly. With two strong brands in its kitty, the company is now clearly the number one player and should now command greater pricing power.

The coconut hair oil business contributes approximately 55-60 per cent of revenues and around 80 per cent to profits. With better pricing, the numbers should improve.

In fact, unless, copra prices "" which have been benign in 2005, falling by about 25 per cent ""- rise dramatically, Marico should post stronger numbers than it has in the past few years.

Its operating profit margin which was just 9 per cent in FY05, could go up by about 300-400 basis points in FY06 and stabilise at these levels. The return on average equity, which stood at around 34 per cent in FY05, could also see an improvement.

The company plans to enter new categories such as baby oil, foods and soaps. While there is an opportunity in these categories, the risks are also high given the competition.

At the current price of Rs 495, the stock trades at 21 times FY07 EPS, a slight discount to Godrej Consumer which trades at 22.5 times FY07. Perhaps once the numbers start to kick in, the stock would see a re-rating.