What comes next?
Jan 20 2013 , New Delhi
Shares of most private lenders, IT, FMCG, healthcare and auto firms from the BSE 500 pack have outperformed Sensex during the latter's bid to recapture the 20,000 milestone
On the other hand, stocks from troubled sectors, including capital goods, oil & gas, telecommunications, power generation, metals and aviation constituted a majority of the 294 stocks that underperformed the BSE benchmark. An FC analysis looked at how the various sectors performed during the 24-month period and tried to find out what lies ahead. The analysis also looked at whether the recent gains were sustainable, and if yes, which stocks or sectors may contribute more.
Numbers available with corporate database Capitaline showed despite the BSE Sensex on Friday recapturing at the height it had reached two years ago, as many as 78 stocks from the BSE 500 pack posted over 50 per cent returns, while 33 per cent jumped more than double during the same period.
Shares of 16 IT software companies from BSE 500 pack outperformed the Sensex since January 6, 2011, when Sensex last hit 20,000.
Shares of Satyam Computer, HCL Technologies, Oracle Finance and Tech Mahindra jumped 62.70 per cent, 47.63 per cent, 44.16 per cent and 36.66 per cent, respectively. The largest Indian IT company by revenues, TCS saw its shares rising 15.07 per cent during the same period, thanks to back-to-back healthy results in the past several quarters. The IT stocks have gained despite the fact that the last two years were challenging for service providers, with a depreciated rupee the only saving grace.
Viju K George of JP Morgan pointed out that due to increasing cyclicality in Indian IT, there has never been two successive years of anaemic growth for the industry. He expects 2013 to be a turnaround year for IT players.
“Partly due to its larger size and partly due to volatility in the macroeconomic climate, Indian IT has become far more cyclical today than pre-Lehman. Accordingly, we could see uneven patterns in yearly growth, but to expect 2013 to follow a similar course as in 2012 would imply that Indian IT is structurally challenged for growth – a bearish thesis we do not agree with. We think we are at the low-end of the cyclical turn today, but are on the cusp of an upward move due to low discretionary spending,” he said in a note.
From the banking sector, 16 lenders from the BSE 500 pack have posted positive returns since Sensex last hit the 20,000 mark, on January 6, 2011. Of this, 13 banks were privately owned.
Major private lenders, Yes Bank, IndusInd Bank, HDFC Bank, Kotak Mahindra Bank and ICICI Bank have returned 83.18 per cent, 71.68 per cent, 42.40 per cent, 40.89 per cent, 41.48 per cent and 11.60 per cent, respectively, during the period.
However, RBI’s recent hint of no rate cut in the January 29 policy has dampened mood at the banking counter. At the same time, the announcement on partial deregulation in diesel prices has lifted shares of state-run oil companies.
Some experts believe that RBI may keep policy rates unchanged in the forthcoming review, but the impact of diesel price hike could not restrict the apex bank to follow money easing policies in the months to come.
“Impact on inflation may not be immediate, but by the time the dust settles, this decision (partial diesel deregulation) could push up the WPI and CPI by 0.5 per cent, which, in our view, is not substantial and would not get in the way of the central bank’s monetary policy decision in the coming months,” said Taimur Baig, chief India economist at Deutsche Bank.
Shares of oil marketing companies BPCL and IOC have risen 40.45 per cent and 1.82 per cent, respectively, during the two-year period. While the entire gains in BPCL came since December 2012, IOCL too recovered lost ground during the past two months. However, despite the recent surge, HPCL shares are still down 6.34 per cent compared with where they were two years ago.
“If the diesel price hike were implemented till retail price equals market price, it would have a huge impact, as the fuel accounts for around 60 per cent of total GUR (gross under-recoveries). However, it is important to note the staggered diesel price increase every month to completely eliminate subsidies is still subject to government interference as in the past,” pointed Abhinav Goel, senior director for corporate ratings at India Ratings.
As far as Sensex is concerned, IT, banking and oil & gas together contribute a majority 55.34 per cent weightage. Adding FMCG, the weightage exceeds over 65 per cent. Therefore, for Sensex to perform well, these sectors need to perform well too.
FMCG shares such as GCPL, Marico, Emami, HUL Dabur and Colgate surged anywhere between 35 per cent and 85 per cent during the period.
Large pharma shares such as Cipla, Sun Pharma, Dr Reddy’s and Wockhardt remained among 20 pharma stocks that gained between 5 per cent and 357 per cent (Wockhardt) during the period.
The defensive nature of FMCG and pharma shares helped stocks from these two sectors to receive premium valuations over other sectors during the Sensex re-run to 20,000 mark.
Nonetheless, during the December quarter, the Indian pharma market grew at 13 per cent YoY, the weakest in 2012.
“Our discussions with the pharma companies in our coverage group pointed that most companies were of the view that this was a transient dip, given no structural issues in the industry, consistent with our positive outlook for the Indian pharmaceutical market. However, this could be a near-term damper on pharma stocks performances after outperforming the market in 2012 by 18 per cent,” said Balaji Prasad at Barclays.
Meanwhile, cement stole the limelight during the past two years. Shares of JK Cements, JK Lakshmi Cements, Shree Cement, UltraTech Cement, Ambuja Cements, ACC and Madras Cement were all up from 30 per cent to a whopping 140 per cent. The better-than-expected September quarter results and recent hike in cement prices across most regions (Rs 5-30 per bag) on expectations of a pick-up in demand, is seen positive for the sector.
“We recommend buying into stocks on any weakness as the recent price hikes would lead to a rebound in Q4. We remain positive on the sector,” said Mihir Jhaveri and Prateek Kumar of Religare Capital Markets.
Auto and auto ancillary shares also returned well during two-year period. Tata Motors, Maruti, Bajaj Auto and M&M remained top performing vehicle makers. Rate cuts and revival in economy could lift the volumes for automakers. Among the beaten down sectors, telecom spectrum auction by March 31 would be keenly followed. In the past two years, Tulip Telecom, Onmobile Global, MTNL and RCom dropped 86.64 per cent, 70.85 per cent, 52.68 per cent and 40.51 per cent, respectively. Tata Communications and Bharti Airtel fell lesser at 4.41 per cent and 1.30 per cent, respectively.
Another troubled sector, real estate has shown signs of revival.
Experts believe strategies like monetisation of land and non-core assets, exercising prudence in new launches and adopting the JV route to develop projects, could bring the sector back in action.
While DLF fell 5 per cent, HDIL, Parsvnath Developers and Unitech plunged over 30 per cent in the past two years.
Ailing airlines companies are still looking for foreign partners after the government allowed better FDI terms in airlines in September. Any deal could help recovery in airline shares.
So far, Jet Airways, SpiceJet and Kingfisher Airlines are quoting lower by 24 per cent, 44 per cent and 78 per cent, respectively, from their January 2011 levels.
For metals and mining, capital goods and power, further reforms are the only hope. zz