Nifty: The famous five - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

Nifty: The famous five

Aug 27, 2004

Based on trailing twelve months earnings, the Nifty is currently trading at a P/E of almost 13x. However, not all companies and consequently the sectors constituting the Nifty are commanding the same valuation. While some are trading at a premium, others are trading at a discount. Let us try and find out which are the top five sectors that are a favorite with investors these days and the likely reasons behind the same.

IndustryMarket cap
(Rs m)
(Rs m)
SOFTWARE1,014,903 37,935 26.8
ENGINEERING171,372 7,873 21.8
TELECOM377,403 17,534 21.5
PHARMA362,833 17,150 21.2
POWER 166,677 9,071 18.4
FMCG585,556 37,236 15.7
CEMENT194,682 12,912 15.1
AUTO454,880 34,857 13.0
ENERGY SOURCES1,370,008 142,076 9.6
BANKING616,371 72,222 8.5
METALS498,773 72,712 6.9
Total 6,773,468 538,912 12.6
* Trailing 12 months

Software: Trading currently at a trailing 12 months P/E of 27x, the software sector commands the highest valuation and enjoys a significant lead over its closest counterpart. The rich valuations are a consequence of the robust performances of the companies in the recent past as well as their equally impressive future growth prospects. As per the leading IT research and consultancy firm, Gartner, total worldwide IT services spending is expected to grow from US$ 535 bn in 2002 to US$ 727 bn by 2007, a CAGR growth of 6.3%. Also, as per NASSCOM, India's software services exports grew by 25% in FY04, from US$ 9.6 bn to US$ 12.5 bn. This represents a mere 1.6% of the global IT services market. NASSCOM also expects Indian IT services exports to cross the US$ 56 bn mark by FY08, which would mean CAGR of over 45% in the four-year period (FY04-FY08). Both these factors combine to signal Indian software sector's huge growth potential going forward. No wonder then that this sector has become the blue-eyed boy of the Indian stock market.

Engineering: Awash with funds, most of the companies in the Indian corporate sector have embarked upon an expansion spree in recent times. According to a leading business daily, corporate India added fixed assets worth Rs 334 bn in FY04, a significant 33% growth than the previous year and it is not done yet. Infact, India Inc could be heading for its first major capacity creation spree since the now infamous binge of mid-nineties. Investments on such a large scale would mean swelling order books for engineering companies, as they would be called upon to execute the projects. As a consequence, engineering sector is ranked second currently in the valuations sweepstakes as they might see their earnings growing significantly in wake of the new capacity creation that is underway.

Telecom: With a population of over a billion and teledensity of merely 4 to 5 per 100 people, there is an enormous growth opportunity to grow for the Indian telecom companies. Therefore, a valuation of 21x that is being commanded by these companies does not come as a surprise. In fact a chunk of it is due to the presence of Bharti Televentures, India's leading cellular player. However, going forward there are some concerns. While the growth in subscriber base is expected to remain robust (over 100% growth in cellular subscriber base), it is the falling ARPUs (Average Revenue Per User) that have started to bite the cellular companies. The result is diminishing margins and falling profitability. But over the long-term, price-based competition is unlikely to persist and the quality of service is likely to emerge as a key differentiator. Moreover, while the sector per se would show impressive growth numbers in the times to come, the going may not be that easy for small individual players.

Pharma: Armed with a rather liberal process patent policy and availability of low cost manpower, Indian pharma industry has grown at a tremendous rate in the past few years and is now making its presence felt in the global arena. With pressure on the US government to reduce healthcare costs, it has passed regulations to speed up approval procedure for generic drugs, a market which is expected to touch US$ 100 bn by 2012. This is a great opportunity for Indian drug manufacturers to exploit, as the cost of production in India is low as compared to the West. The domestic market is not faring badly either and is expected to provide further fillip to the sector companies. On account of these reasons, the sector currently commands a valuation in the region of 21x.

Power:Rounding up the list is the power sector that currently enjoys valuation in the region of 18x. Power is one of the most important vehicles of infrastructure that can help a country achieve higher economic growth. Recognizing the importance of power, the government has set an ambitious target of increasing the per capita consumption to 1,000 units by 2012, which is almost three times the current level. The 10th plan set a target to add 41,110 MW of generation capacity by 2007. Considering the track record, even if 50% of the above-mentioned capacity is achieved, it will result into a spectacular growth opportunity for the sector companies. However, power projects are long gestation projects and benefits only accrue in the long term. Therefore patience is an important virtue here.

Having looked at the top five sectors in terms of valuations, we would like to advice investors that rather than putting all eggs in one basket, they would do well to diversify and allocate their investments across different sectors. This will shield them from the vagaries of the stock market. After all, diversification is the key to successful investing.

Equitymaster requests your view! Post a comment on "Nifty: The famous five". Click here!


More Views on News

BSE Sensex Surges 510 Points; ONGC Among Top Gainers (Market Updates)

Sep 28, 2020 | Updated on Sep 28, 2020

The BSE Sensex Surged 510 Points; ONGC Among Top Gainers. Find the latest update, special reports and news on all time high gainers of BSE Sensex at

Why the Market May Rally for a Few Days (Fast Profits Daily)

Sep 28, 2020

Why I think the market can rise for the next few days.

My Top Pick for 2021 is Not a Stock. It is Something Much More Powerful (Profit Hunter)

Sep 28, 2020

My top pick for 2021 is something that has helped me and my subscribers beat the stock market by a factor of 2:1.

Your Queries on the 8-Year Cycle Answered (Fast Profits Daily)

Sep 25, 2020

You've sent in your queries on my videos on the 8-year greed and fear cycle in the market. I'll answer them in this video.

It's When You Sell that Counts (Profit Hunter)

Sep 25, 2020

How I alerted readers to the impending crash last week.

More Views on News

Most Popular

Why We Picked This Small-cap Stock for Our Hidden Treasure Subscribers (Profit Hunter)

Sep 17, 2020

This leading household brand will profit big time in a post covid world.

My Top Stock to Buy in this Market Selloff (Profit Hunter)

Sep 22, 2020

The recent correction offers a great opportunity to buy this high conviction smallcap stock.

Can the Nifty Fall to 10,200? (Fast Profits Daily)

Sep 24, 2020

The Nifty has reached an important support level today. If it breaks then we could see further downside.

What Do the Charts Say About Buying Smallcaps Now? (Fast Profits Daily)

Sep 18, 2020

Everyone seems to be excited about buying smallcaps now...but is it the right thing to do? What do the charts tell us? Find out in this video...


Covid-19 Proof
Multibagger Stocks

Covid19 Proof Multibaggers
Get this special report, authored by Equitymaster's top analysts now!
We will never sell or rent your email id.
Please read our Terms


Sep 28, 2020 03:14 PM