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Markets: What's hot? What's not? - Views on News from Equitymaster
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  • Apr 5, 2006

    Markets: What's hot? What's not?

    The Indian stock market indices have had a record run. Given the record increase in assets under management of Indian mutual funds (MFs), liquidity is not a problem, atleast for now. Every word of caution even by the most experienced of players in the market has been proved wrong. With the above backdrop, let us now analyse the sectors leading the rally in the first quarter of the current year and what lies ahead.

    Index As on Jan 1 2006 As on Mar 31 2006 % Change
    Capital Goods 5,817 8,171 40.5%
    FMCG 1,636 2,211 35.2%
    Auto 4,233 5,323 25.7%
    BSE Sensex 9,390 11,280 20.1%
    BSE Small Cap 6,028 6,592 9.4%
    IT 3,720 4,030 8.3%
    Bankex 5,130 5,265 2.6%
    Consumer Durables 3,297 3,212 -2.6%

    As can be seen from the table above, the capital goods sector has outperformed by more than two times. India's need to focus on infrastructure is nothing new. This time, this has been fuelled by record growth in the topline and bottomline of infrastructure-related companies i.e. power, engineering and capital goods. The order book has been burgeoning with order book to sales for the sector, on an average, at around 2 to 3 times. These factors clubbed together resulted in capital good stocks figuring on the priority lists of all sections of the investor group.

    For the FMCG sector, one has to remember that it is a play on 'India's consumption potential'. The sector is back on track and is on the path to recovery. Growth is being witnessed in urban as well as rural areas. With the implementation of VAT from 1st May 2005, it was a shot in the arm for organised players, as brands will become cheaper in times to come. Owing to this, smaller and unorganised players might lose the competitive edge, which in turn will benefit larger players. Organised retailing has brought a new lease of life to the FMCG sector. With income growth prospects looking strong, FMCG demand is likely to trace GDP growth in the next three to five years.

    The auto sector also outperformed the BSE-Sensex. There are several reasons for the same. Demand for automobiles has remained robust (since September 2003). Internal restructuring by auto majors is also reflected in higher margins, despite cost escalations (operating margins in the December quarter expanded by around 200 basis points). What more, the FM reduced excise duty on certain cars, which has brought down the average price. However, a thumb rule followed by all developed countries is being ignored in our country. The rule says that for every 1 m vehicles sold, the road network has to be augmented by atleast 1,000 kms. Are we doing it?

    The banking stocks underperformed the BSE Sensex due to several reasons. The December 2005 quarter saw the redemption of the India Millennium deposits, thus creating liquidity pressure. Interest rates are expected to harden, which could slowdown demand for credit. As has been the case in the last quarter, the net interest margins of the banking sector, as a whole, is likely to come under pressure in the next two years. Perhaps this explains the underperformance of the banking index.

    We suggest investors to exercise extreme caution at current valuation levels. While we advocate selective equity investment from a three to five year perspective at these levels, one should have the appetite to withstand any sharp decline in stock prices in the near future. As somebody once said "there is always a second time in the stock market".



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