Quiet achievers

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While you watched Sensex crawl and brooded how equities have lost sheen, a bunch of stocks saw a three-year bull run

Quiet achievers
Indian stocks have been trading in a range-bound fashion over the past three years. Look at the data: the benchmark Sensex has given just 9.76 per cent return in nearly three years since January 2010. Fixed deposits at public sector banks would fetch investors the same kind of returns every year!

But hold on and scratch the surface.

Away from the spotlight of the benchmark indices, a silent multi-year bull run is happening in a sizeable chunk of the market. Stocks from pharmaceuticals, cement, FMCG, automobiles and consumer durables sectors have been on a major bull run over the past three years, without the usual hype associated with this kind of a frenzied run. What’s more, leading analysts and big brokerages are still bullish on these sectors.

The numbers would bear testimony. The BSE FMCG index, which tracks stocks such as ITC, Hindustan Unilever, Nestle and Colgate Palmolive, has given a whopping 117 per cent returns since January 2010, when Sensex has seen only a meagre gain.

The BSE consumer durables index reflects a similar story. The index, which has Titan Industries, Gitanjali Gems, Rajesh Exports, TTK Prestige, Blue Star, Whirlpool, Videocon Industries and Bajaj Electricals as its components, gave 102 per cent returns over the same timeframe.

The BSE Healthcare index, which tracks a clutch of pharma stocks such as Sun Pharma, Dr Reddy’s Lab, Cipla, Lupin, Glaxo Pharma, Ranbaxy Lab, Divis Lab, Apollo Hospitals, Wockhardt, Cadila Health and Strides Arco, among others, has gained 57 per cent during this period.

Auto stocks too have fared very well. The BSE auto index whose constituents include Tata Motors, M&M, Bajaj Auto, Maruti Suzuki, Hero MotoCorp, Bosch, Cummins India, Ashok Leyland and Bharat Forge has given 45 per cent returns.

Even big cement firms have given big returns. Ultratech has given 113 per cent returns since January 2010, Ambuja Cement 100 per cent and ACC 60 per cent. There is no separate index to track cement stocks.

What is happening here? Clearly, underperformance by some of the heavyweight stocks such as Reliance Industries, ONGC, State Bank of India and Larsen & Toubro (though it has performed well this year) are massively affecting the performance of the benchmark indices.

It also bears out the point that investors may be missing; that investing in stocks is not always a losing proposition.

There has been a “fascinating and silent bull run” going on in India, Madhusudan Kela, chief investment strategist at Reliance Capital, said at a recent event in Mumbai. “As much as 50 per cent of the market is in bull run; it is in the FMCG, cement, auto and pharma stocks,” he explained.

On hindsight, it may look easy to select stocks from the above-mentioned sectors to boost your returns, but Kela cautioned that a sector-specific approach may not help investors as there are “hazardous” stocks in every sector.

For instance, in the auto sector there are stocks such as M&M, Maruti Suzuki, Eicher Motor and Escorts. “Blindly selecting stocks in a sector will not do any good to investors,” he said. The reference is to the subdued performance by Eisher Motor and Escorts.

Rajesh Jain, EVP and head of retail research at Religare Broking, explained the spectacular performance by FMCG, pharma and auto sectors to the rush of money, especially institutional funds, into the mainline stocks in these sectors. “These stocks are now held in stronger hands, and hence, they are going up,” he added.

What Jain is saying is simple. Institutional investors hold on to their portfolios for a longer period, unlike retail or small investors, who run to exit a stock at the first sight of profit, only to see the price going up further and further. Even on the downside, they exit in a huff at the first sight of bad news. Studies show the average Indian small investor turns his portfolio completely in every 18 months.

Going forward, experts reckon export-oriented (such as pharma and IT, due to a depreciation of the rupee, among other things) and interest-rate sensitive (banks, auto, realty on expected rate cuts from the March quarter) sectors to derive maximum gains for the stock market.

Consumption-oriented FMCG and consumer durables, too, are expected to benefit from higher rural sales, thanks to direct cash subsidies in the coming years, which is expected to result in more cash in the hands of the rural populace. This means they would be able to spend higher and better on toothpastes, shampoos and soaps and two-wheelers and televisions.

Deutsche Bank analysts Manoj Menon and Gaurav Bhatia, in a note last week, said stock selection will be key from here on, especially as Indian consumer-focused companies have multiple levers to manage growth — strong pricing power, benefits of distribution expansion and ability to expand, increase innovation to manoeuvre their way out of a potential slowdown.

”We like opportunities in discretionary consumption over staples in the long term,” they wrote. ITC, Marico and Titan are the bank’s top buys in the sector.

As far as the pharma sector is concerned, there is a huge upside potential for exports. This is because exports of top 10 Indian pharma firms is just 3.3 per cent ($7.4 billion) of global generics spending ($228 billion; excluding India), explained Nitin Agarwal and Vineet Chandak of IDFC Securities, in a note. The meagre share is despite exports growing at 17 per cent CAGR (compounded annual growth rate) over the past five years compared with 12 per cent CAGR in global generics.

Their market share is even lower at 1.1 per cent of global spending on medicines, which is estimated at around $11 billion, they pointed out.

“We believe formulation exports of top 10 Indian pharma players can more than double to around $15 billion by 2016 with just 70 basis points (one basis point is equal to one-hundredth of a percentage point) increase in market share to 4 per cent,” the IDFC analysts reckoned.

Also, US generics (second largest generics market) will double by CY16E ($80 billion; driven by patent expiries) – providing a big growth opportunity for the Indian players.

“While organic growth will be the anchor, M&A strategies will determine the winners,” they said, pointing out good potential for Sun Pharma, Lupin and Dr Reddy’s on their inorganic growth potential.

Finally, from the macro point of view too, things will can improve from here as detailed by Goldman Sachs in a report last week. “We forecast India’s GDP growth to accelerate from 5.4 per cent in 2012 to 7.2 per cent in 2014, and remain high through 2015-2016. Three factors drive our relatively optimistic views: a decline in oil prices in real terms over the next few years, a more favourable external demand outlook and domestic structural reforms, which can ease some supply-side constraints,” it said.

It’s time to buy large-caps that will benefit from these and hold them tight for the next two to three years, it seems.


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