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Some Sectoral Rotations Due
Essence of the Week
Oct 24, 2016 | Source: AxisDirect
The monthly operating metrics for each sector are provided in every mid-monthly edition, as in this report
By year-end, the US Presidential rhetoric will die down (effect on Indian pharma/ IT), Fed would have hiked rates (USD impact), crude would have risen. In 2017, effective Indian rates would continue to fall, India Inc. would be more deleveraged, GST essentials would be frozen. On the iffy side, UP (~May) & Punjab (~March) elections would start miring the socio-political dialogue, while manufacturing & services low-end wages would go up with the proposed rise in minimum wages and spreading out of Pay Commission awards to the state theatres, etc.
We looked at the sectors and stock performance in BSE 100 and BSE 500 Cos from this FY low, to assess where we see changes over the NEXT 6 months. Page 3 provides a table for BSE 100. Among largecap sectors, the outperformers were Metals, Cement, Auto and Pvt Banks. The underperformers were FMCG, Pharma and IT. Among narrower sectors, the outperformers in BSE 100/ 500 (with adequate mkt cap representation), apart from the abovementioned outperformers, were NBFCs (& PSU banks), OMCs (& Gas utilities), Chemicals (agro, specialty, paints)
Following is our prognosis over the next 6 months for each of the above sectors:
Metal stock prices would start leveling off, with Hindalco being our best pick. Metal prices rose due to global mine closures + rising energy costs (coal & oil). However, Hindalco uses local coal costs whose prices won’t rise in line. Ferrous players use imported coking coal. Watch GBP and USD movements.
Cement stocks will have their last cyclical valuation upgrade now, as the next 1-2 years will be their ‚Usain Bolt‛ years, with earnings growth way ahead of most other sectors UltraTech is our best large cap pick.
In Auto stocks, action will move to CVs (better valuation, as their early-cycle growth is leveling off but yet decent at 10% for FY 17) vs. Pax cars & 2W (higher growth but much higher valuations). The lagged effect of good monsoons & interest rate cuts make Ashok Leyland our top pick.
Pvt Bank stocks will also see a change in complexion, with corporate lenders like ICICI our best pick, due to pick up of India Inc. deleveraging and interest rate down-moves.
Coming to the 3 largecap underperformers, Pharma is the only one which could see a positive surprise in case US FDA resolution plays out (esp. Sun Pharma, DRL, Lupin). Relatively, we prefer Aurobindo which has demonstrated strong approval momentum and US FDA clearance in its key plants. In IT, look at smaller Digital plays. FMCG volumes have been falling and competition will continue to increase. Margin increases will reverse, and as industrial capex kicks off, their over-valuations will get further de-rated. In the Consumption basket, preferdurables and Retail stocks.
Engg/ Infra performed unobtrusively. Items to specifically watch are Defence orders for L&T, restarting of stuck projects and NTPC emission-norm tenders for BHEL, and exports for Cummins. Industrial capex would take at least another 12 months to start reviving, given current utilization levels.
Coming to narrower sectors, NBFCs benefited from new domains like microfinance/ LAP, new geographies, decreasing cost of funds, regulatory comfort and underestimated penetration by investors. However, apart from L&T Finance and mortgage Cos like LIC Hsg (given weak job growth, the Govt is likely to push a prime driver such as housing in its forthcoming Budget), valuations leave little margin of safety. The call on PSU Banks remain iffy, depending on additional capital availability and deleveraging of India Inc.
OMCs are likely to be re-rated due to continuing volume and margin growth (refining & marketing). In Chem/ ferts/ paints, Agri-chem stock prices already factor in a good 2017 monsoon while specialty chem is too heterogenous, with some Cos helped by Chinese closures; however other Chinese Cos may restart; hence no generic comments possible. Sugar cycle should peak over the next 2 years; however, the Govt keeps a hawk-eye on sugar.
Lagniappe: Increasingly, private capex spend on Chinese and Israeli electronics in defence, telecom and solar will continue, but largely in our unlisted space. Gradually, these imports will be ‚Made in India‛.
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