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Sensex: Sectoral play

Jun 26, 2003

The indices have displayed strong and steady upward movement in the last couple of months, registering gains of almost 20%. Three index heavyweights i.e. HLL, Reliance and Infosys together constitute over 1/3rd of the weight on the BSE Sensex. Of the 557 points gain seen on the Sensex since May 1, 2003, these three stocks alone accounted for 39% (or 218 points) of the gains. In a similar manner, there are certain sectors, which have their say (weightage) on the index. Thus, if we consider these sectors, out of the 11 sectors represented in the index, the top 5 sectors account for over 70% of the weightage. Thus, in effect, the fate of these sectors decides the movement of the index. Let us consider in brief, how these sectors are likely to pan out.


*Diversified/Telecom/Media

FMCG, the leading representative sector on the Sensex, has a weightage of over 23%. The performance of this sector is more or less directly correlated to the monsoons. This is because, nearly 70% of the Indian population depends on the agrarian economy for survival, and poor monsoons have an adverse impact on their incomes. However, good monsoons improve their spending power, which leads to higher consumption. The benefit of this is also derived by the auto industry (weightage 6%), which is dependant on the spending power of the population. With the rains predicted to be near normal, better days for these sectors seem to be on the horizon. However, a close watch on monsoons is the call of the day.

The next big sectoral representation is the banking and finance sector (14%). This sector has been in the news since the last two years or so. The Securitisation Act and falling interest rates has augured well for the sector. Moreover, going forward, consumer and corporate credit growth is likely to continue to provide the growth impetus for the sector. Though, due to the huge run up seen in banking stocks, some near term caution may be advised, the long-term growth prospects remain intact. The third highest weightage (12%) goes to a single company, Reliance Industries. The prospects for the company hold promise as the petrochemical cycle is already on an upturn and the company, with its huge capacity, is well poised to take advantage of the same. Moreover, APM dismantling, entry into the petroleum retail segment and the huge gas findings will help the company sustain its growth momentum.

The next big sector is the software sector (11%). FY04 has been a disappointing year so far for this sector (in terms of stock market performance). Software stocks turned out of favour post Infosys' guidance, which warned of lower earnings growth due to continuing pressure on margins for the industry. Due to the global slowdown, customers are forced to ask for finer billing rates, which have put pressure on operating margins of Indian software companies. With the world economies still showing no strong signs of a recovery, it seems that the pressure on margins are here to stay for a while. However strong volume growth is a reality as MNCs become increasingly comfortable with the Indian offshoring model.

On the other hand pharma sector (11%), the next big representation on the Sensex, has already exhibited immense potential to grow. Indian pharma companies have shown their competitive strengths as they increasingly capture generics markets internationally. Moreover, the contract manufacturing story is another positive for this sector.

To conclude, considering the current composition of the Sensex, we feel that it still has a long way to go, as the high weightage constituents of the index seem to display strength and the potential to grow. Apart from the above, triggers like the divestment process and hike in FDI limits in certain sectors could provide a further fillip to investor sentiments and consequently the capital markets. Thus, invest in sound management companies and invest for the long-term.

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