Old economy in limelight

A noticeable change has taken place in the markets since the beginning of the current fiscal. The so-called new economy stocks have been out of the radar screen of investors and old economy stocks have taken center stage. Investors seem to be finding value in these stocks as a result of which these sectors are being favoured. Also due to the pessimism towards the software sector, capital from this sector seems to have shifted to old economy counters. Steel and aluminium stocks have also been positively impacted. Of course, it is needless to say that certain sectoral developments have also played a key role, which has subsequently led to these stocks outperforming the indices.

To begin with, the primary cause for the run up in aluminium stocks has been the considerable improvement in aluminium prices in the last few months. Since, domestic prices follow the international prices closely, domestic aluminium companies are also likely to reap benefits of higher prices. Also, going forward, the outlook for the aluminium industry seems bullish in the long run. With abysmally low per capita aluminium consumption levels (under 1 kg for India compared to 3 kgs in China and 27 kgs in US), the room for improvement is relatively high. Moreover, the government's continuous efforts on the infrastructure front could emerge as a crucial growth driver for this sector.

Power sector reforms will also assist the growth of aluminium industry. It must be noted here that power sector consumes over 1/3rd of the domestic aluminium. And with the government having earmarked Rs 400 bn for the power sector (including Rs 200 bn for transmission and distribution), it is only a matter of time before the benefits start accruing to the aluminium industry. Also, with the Indian auto industry on the growth path, and India likely to be the outsourcing hub for automobiles, the auto sector will further contribute to this sector's growth prospects.

Backed by stability in demand for steel and the sustainability of steel prices, steel sector continues to outperform the indices. Chinese steel consumption has played a very key role in helping sustain the domestic steel growth. This is because China consumed 200-210 MT of steel as against its production capacity of about 180 MT. The shortage was met with imports by the country and this huge consumption led to rise in prices. Going forward, with China likely to continue to grow aggressively, the demand for steel, and consequently prices, is likely to be sustained. However, one must not forget that with new steel capacities coming up, steel prices could be under pressure.

Though the steel and aluminium industries are susceptible to cycles, in the long term there are instances of companies generating strong returns (e.g. Hindalco stock price has appreciated 18% CAGR in the last 13 years) for shareholders. Thus one must invest in companies that are driven by strong and visionary managements. Also one needs to look at the standing (market leader or follower) of a particular company in the current scenario before investing in the same. The economic prospects of India look promising in the long term and commodity industries have a major role to play in the development of the country.