Jun 30, 2004|
Index weightages: Shifting priorities?
Last year same time, we had written an article on the various sectors that form a part of our benchmark stock market index - the BSE-Sensex. In this article, we re-visit the same and try to gauge what the prospects are (in terms of the trend) for the Indian stock markets amidst the changes that have taken place amongst the index constituents and re-shuffling of the sector weightage that has taken place in the last one year.
To begin with, let us first see what were the sector heavyweights that dominated the Sensex during June 2003. As can be seen in the chart below, FMCG, energy (including petrochemicals) and banking (including Financial Institutions), in that order, dominated the index then with the three of them together making up nearly 55% of the total weightage. On the other hand, emerging and also the so-called new economy sector like telecom hardly had any representation in terms of weightage.
Fast forward to June 2004 and the sectoral representation of the Sensex is a considerably changed picture. Energy has taken over the FMCG sector to become the numero uno with a huge 31% share (thanks to ONGC and Reliance). A distant second is the software sector (16%) followed by banking (11%). However, this time around, the telecom sector had an increased presence with a 6% weightage. The two sectors that took the maximum hit for the gain in shares by other sectors were FMCG and pharma, both of which lost nearly 50% of their weightage.
Now let us consider in brief how the top three sectors are going to pan out over the next couple of years:
Our outlook towards the energy sector, responsible for nearly 1/3rd of the index weightage, remains positive. However, rather than considering the sector in its entirety here, it would be appropriate to consider just two stocks i.e. ONGC and Reliance, since they together account for nearly 90% of the energy sector weightage on the index. The case for ONGC is that it is aggressively acquiring oil fields abroad, thereby diversifying its upstream business and at the same time entering into new businesses such as high margin petrochemicals and retail marketing of fuels. Whereas, in the case of Reliance, apart from the strength in the petrochemicals cycle, it is now gearing up for its retail venture into the petroleum segment and shall soon start commercial production of natural gas, all of which augur well for the company. Further, their asset-rich nature of business coupled with strong cash flows are an added advantage.
Top gainers...and the losers
The second big sectoral representation is that of the software sector (16%). In line with the index in 2004, software sector stocks have also been out of favour. However, we believe that there has been no fundamental shift for companies in this sector. Along with an impressive FY04 financial performance, their move towards high-end services has not only helped these software majors cap the decline in overall billing rates, it has, more importantly, brought their managements more closer to the clients (as these services have a higher onsite content, at least to start off with). As far as the outsourcing backlash is concerned, we would like to reiterate that while this may hurt valuations in the short to medium term, over a long-term, economic sense is likely to prevail. Thus, the next couple of years continue to emanate positive signals for the sector.
As far as banking is concerned (11% weightage), we believe that fundamentally nothing has changed enough for the sector that would warrant the kind of sell off witnessed over the last couple of months. This is because, if one were to look at the core lending operations of the banking sector, we may be in for a higher growth trajectory. The revival in industrial credit growth, coupled with an already buoyant retail credit segment may mean that credit offtake from scheduled commercial banks may well exceed the 15% growth (including both food and non food credit) that was seen in FY04. Added to this, the new government has promised higher investments in the rural, industrial and infrastructure sectors. This requires an active participation in the form of credit disbursal by the banking and finance sector. Further, despite the setback for the sector in the form of a stalled hike in FDI limits, we feel that further deregulation may be an eventuality going forward. Thus the way forward is clearly progressive for the baking sector.
Further, barring auto and steel, which form a mere 10% of the index weightage, we remain selectively positive on majority of the sectors like telecom, engineering, media and pharma. Thus, to conclude, considering the current composition of the Sensex, we feel that the Indian stock market story is not yet over, as the high weightage constituents of the index seem to display strength and the potential to grow. However, expectations need to be toned down as compared to last year.
All weightages are as on June 29, 2004.
For the purpose of comparison with the year 2003, L&T has been classified under engineering while Grasim has been classified under the cement sector.
Commodities include aluminium, cement and steel.
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