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Stock Markets: The second time... - Views on News from Equitymaster
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  • Feb 11, 2004

    Stock Markets: The second time...

    After three consecutive bearish years for the stock markets, 2003 saw a reversal of fortunes for investors. During 2003, the market capitalisation (market cap.) of the NSE-50 Index (Nifty) gained by an astounding 76%! Here we look at some sectors, which managed to outperform the overall index growth. We look at, in brief, the drivers for the same and also how could things shape up going forward.

    Industry % gains
    Steel 282%
    Engineering 190%
    Diversified 172%
    Shipping 168%
    Power 166%

    Note: Data restricted to NSE-50 stocks

    The above table lists down the top 5 gainers in terms of market capitalization in 2003. Let us look at some of the key drivers for the sectors above:

    The sector witnessed huge gains on the back of improved performances of steel companies, which was primarily a factor of strengthening steel prices (about 15%) and higher volume sales. The insatiable steel demand from China, owing to huge requirements for its infrastructure development needs, strengthened world steel prices. However, going forward, investors need to considerably reduce their return expectations, as according to industry sources, steel prices are unlikely to harden from hereon.

    The growth in the engineering sector could largely be attributed to the infrastructure drive currently underway in the country. Further, growth in the power sector has also an important role to play in the growth of the engineering sector, owing to the government's aggressive stand at encouraging the set-up of power generation capacities to meet the current power requirements. The government's intentions are also evident from launch of the Accelerated Power Development Reforms Program (APDRP) and the sops announced by the Finance Minister (FM) during the interim budget presented in January 2004. Further, with strong GDP growth likely to continue, the power sector would continue to show signs of strength going forward.

    In this category, we have included two stocks i.e. Grasim, which has a presence in cement, sponge iron and Viscose Staple Fibre (VSF) and L&T, which is an engineering major with presence in the cement sector also. For Grasim, while cement has been a drag on its performance, sponge iron (used by the steel industry) and VSF (used by the textiles industry) saw a cyclical upturn during 2003, which helped the company post improved performance. In the case of L&T, while cement put pressure on the company's performance, it was the contribution from the engineering sector (for reasons discussed above), which helped the company grow during 2003. Going forward, the prospects for both engineering and cement sectors look promising, while the sponge iron and VSF segments could stabilise on the growth front.

    The growth in this sector can also be largely attributed to the China factor. Freight rates, both for dry bulk and tankers, witnessed strong growth in 2003. Tanker freight rates gained strength primarily during the first quarter of 2003 when crude oil prices spurted owing to the Iraq war, as consumers tend to build up inventories due to uncertainties with respect to the duration of the war. On the other hand, the cause of the rise in dry bulk freight was owing to the demand from China, as it imported huge quantities of iron ore, coal, coke and other commodities to meet its requirements. Another important development was the passage of the tonnage tax regime, which would lead to substantial savings for shipping companies, which in turn could be ploughed back towards expansion of capacity.

    Having said that, the investors should have a cautious approach towards the companies and should make prudent investment decisions depending on the companies' management and valuations. Although, the potential for growth in the long term is immense, at present, the valuations of many companies seem to be stretched. From here on, growth will be the key driver for any further rise in stock prices and to that extent, the emphasis on risks has to be higher than earnings prospects. Besides, with elections in the offing, it is better to be safe than sorry. As somebody once said "there is always a second time in the stock market".



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