A bet on policy push can hold you in good stead

Tags: Stock Market
If your equity outlook for the new calendar is blurred with too many ifs and buts, such as sustained drop in inflation, which looks impossible right now, a long-term bet on select policy themes might hold you in good stead. In effect, this means reading between the lines to judge where government policies are heading, and taking positions accordingly.

For instance, it doesn’t require complex economics to understand that in its fight to tackle deficit, the government has to cut subsidies substantially, and the fuel sector should be the first to face the axe. The lowering or elimination of subsidies on diesel, LPG and kerosene – even if gradual – will end up greatly enhancing book values of oil marketing firms as well as state-owned energy companies.

Oil marketing firms are constantly at the mercy of the government’s benevolence and have suffered year after year because of delayed release and cuts in dues towards under-recoveries. On the other hand, public sector energy firms such as ONGC, OIL and GAIL lose substantial revenues towards sharing the burden of under-recoveries.

Another trigger for this sector is an imminent review in the gas pricing formula. The Rangarajan committee has recommended moving to a revenue-sharing model prospectively from cost-recovery model now. “If the new gas pricing formula is applicable to all producers, it will be most positive for ONGC followed by Oil India and RIL,” said Harshad Borawake and Kunal Gupta of Motilal Oswal Financial Services.

Another area where the government may go for some structural reforms is railways, where an attempt to raise fares for the much-needed resources has not come about so far, and the absence of the main roadblock, Trinamool Congress, in the coalition may make it easier for the UPA to bite the bullet. This would mean new projects and new order pipelines in railways, which would benefit traditional rail sector-focused companies like Texmaco, Kalindee Rail, Kernex and BEML apart from infrastructure firms such as L&T, ARSS Infra and Hind Rectifier.

Banking sector reforms promise another opportunity. As and when a new set of players come into the banking industry, it would lead to faster expansion of the sector, along with product innovations and consolidation. This may result in more mergers and acquisitions as well as emergence of new leaders. Investors can bet on fundamentally stronger mid-cap players to grow bigger, while fundamentally weaker players could become takeover targets. Also, once the rate-cut cycle begins, borrowing activity would increase towards the later half of the year, which would propel banking sector as a whole.

“The important aspects to focus on are adequate tier-I capital, asset quality and high Casa share, which would help lenders to manage the potential aggressive monetary easing cycle ahead. On pure valuation parameter, PSU banks look attractive, but private banks score over PSU banks in terms of growth, tier I capital and asset quality. We are positive on select players such as Karur Vysya Bank, ING Vysya Bank, Canara Bank, Federal Bank and United Bank of India,” said A K Prabhakar, senior vice-president for equity research at Anand Rathi Financial Services.

The scheme for direct transfer of cash subsidy, which has already been launched in a few districts and is going to be extended to the rest of the country in phases, is going to provide a big lift to rural consumption. This would mean more volumes for bike-makers, consumer durables companies, FMCG firms and even some of the NBFCs, especially those that have bigger rural penetration. Companies like Hero Motocorp, Bajaj Auto, Maruti Suzuki, Hindustan Unilever, Dabur, Marico, Godrej Consumer, Sundaram Finance and Shriram Transport Finance, among others, are expected to benefit from higher rural income.

Retail is another area where the worst seems to be over and the arrival of foreign direct investment (FDI) promises to significantly alter the landscape. This means several players bringing in fresh capital to acquire scale and market share while some of the smaller players might become acquisition targets for foreign players looking to enter the country. And as retail itself becomes a trend for Indian shoppers, bottomlines are going to expand fast. Many of the retail biggies are suffering from huge debt loads and the new route for investment would help them ease their burden and focus on expansion.

Yet another theme could be the usual pre-election push to complete roads and bridges. "Infrastructure is expected to perform well in 2013. Within the sector, growth in road, urban infrastructure and housing and railways are the sub-sectors that are expected to see robust growth. Growth is likely to be propelled both through heightened government initiatives as well as a rise in borrowings in the later half of the year," said Shantanu Deb Mookerjea, executive director of LSI Financial Services.

The main rider to this strategy would be that one must be able to separate the wheat from the chaff. "We continue to recommend a bottoms-up approach and would recommend investors to accumulate stocks having attractive valuations, strong balance sheet and ethical management across sectors," said Dipen Shah, head of Private Client Group Research at Kotak Securities. zz



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