One of the side-shows to the election is the action in stocks of companies believed to have strong political ‘connections’. So, if Modi’s star is on the ascendant, stocks of Reliance or Adani group companies may perk up. As the DMK allocates seats to the Marans, Sun TV and SpiceJet may see unusual activity. Should you bone up on all these political connections and take a calculated bet on the polls? We suggest you don’t.
Stocks of companies that are connected closely to politicians or political parties are likely to lag over the long run. Such stocks have run out of the market’s favour since the CAG report on the 2G scam, says research firm Ambit Capital. Its index of 75 politically well-connected companies has lagged the S&P BSE 500 index by more than 60 per cent from November 2010 (when the Government auditor published the 2G spectrum report). Ambit categorises companies as politically well-connected based on the extent to which they use their political relationships to further their business. The research firm does not make public the names of these companies.
Connections with Lagadapati Rajagopal (of pepper spray in Parliament fame) have not helped the Lanco Infratech stock. It has lost more than 90 per cent since its peak in August 2010, compared with the 7 per cent rise in the BSE 500.
Declining business fortunes, combined with heavy debt burden, took a toll.
Similarly, the stock of Energy Development Company, in which Amar Singh (formerly with Samajwadi Party, now with Rashtriya Lok Dal) is a promoter, has lost more than 60 per cent over the past five years.
This suggests that while political connections of companies can help them get a foot in the door, they do not guarantee success. On the contrary, such links could work to the detriment of such stocks when the political dynamics change. When Jaganmohan Reddy, after he broke off from the Congress, was arrested in a disproportionate assets case, companies such as Ramky Infra which were perceived to be close to him bore the brunt. The stock is down 90 per cent since its public issue in October 2010.
Rules-based economy The market’s wariness towards companies with strong political connections seems to have arisen from the developments of the last few years which have catalysed India’s ongoing transition to a rules-based economy. An unrelenting CAG, intensive judicial scrutiny, and an aggressive media seem to have led to the market leaning away from politically-connected stocks.
Establishing some links with politicians and political parties may be inevitable in the course of doing business in India. But keeping this to the essentials and maintaining equidistance among political parties may just be what the market expects from companies. It’s best to stick with stocks that do not sport political allegiance.
Also read: >Don't bank on opinion polls / >How to play the polls