June 23: The trend in the market today is one of consolidation. The pattern of trading in most of the major stocks reflected this. Predictions of any kind of a correction in stock prices are few. But, then that means very little as the world outside the stock market is still very volatile. The impact that the imposition of a value-added tax on the final selling prices of consumer goods had on stock prices of all marketing companies is a case in point; that in the end it will not take much to end bullish sentiments.

But despite this fact, signs of optimism are very evident amongst traders and that is a sign for the immediate future for stock values. Never in the last six months has the market not reacted to a change in money rates for carrying forward positions and never in the same period has the broking community had the guts to increase the size of their carryforward positions despite an increase in interest rates.

This has happened over the last two settlements. Despite an increase in interest rates of funds lent to brokers from 10 per cent to 20 per cent in just two settlements, the total size of the badla market has increased from Rs 125 crore to almost Rs 200 crore. This only seeks to reflect the bullishness within the system and the fact that there is lot of money available for stocks right now.

HLL-Ponds merger

Ponds has been in demand for quite some time. Since the beginning of the year, the stock has recorded an impressive gain of 121 per cent. This buying has been on account of the proposed merger with Hindustan Lever. However, during the same period, the HLL stock price has appreciated by 61 per cent —— much lower than Ponds' gain.

If one were to go by the current market price (HLL Rs 1,321, Ponds Rs 1,879), the swap ratio is expected to be around 10:14. In other words, the shareholders of Ponds would get 14 shares in HLL for every 10 shares held by them. The stock price ratio as on January 2, 1997 was 10:10.4.

The market seems to have done some homework. Consider this: for the year ended December 1996, while HLL achieved an earnings per share of Rs 28.38, the EPS of Ponds stood at Rs 33.74 —— 19 per cent higher than HLL's earnings. Similarly, as on December 1996, Ponds' book value per share stood at Rs 84.89, which is 31 per cent higher than the HLL's book value of Rs 64.62. Both these ratio which are important for deciding the swap ratio, support the theory that Ponds shareholders would get more than one share in HLL for every share held by them.

However, the market seems to have ignored one point that the balance sheet for both these companies do not reflect the true value of these companies. The reason is simple. Both these companies are not just manufacturing concerns. These companies spend large amounts of money as well as time building their brands.

The future growth is highly dependent on the strength of its brands. And if one were to compare the brand portfolio of both these companies, Ponds is far behind on this front. While the Ponds' brand earned a profit of Rs 44 crore, HLL's brands have earned a net profit of Rs 296 crore in 1996. The valuation based on brands would definitely be in the favour of HLL shareholders. So is it time to sell Ponds?

Aaron Chaze (with contributions from Deepak Singh)

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.