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Sectoral indices: Who did well, who didn't?

Sep 8, 2010

It has been almost a year and a half since the Indian markets touched their lows after the correction of 2008. In this article, we shall take a look at the performance of the sectoral indices since then. Over the past year and a half, stocks from the consumer durables, metal and auto have been the top performers, outperforming the benchmark index by miles. On the other hand, those from the energy sources, power and FMCG spaces have been amongst the worst performers, even underperforming the Sensex's 128% gains during this period.

Table showing the current worth of Rs 100 invested in March 2009
IndexToday's worthIndex PE
BSE CD400 21.1
BSE Metal361 16.2
BSE Auto350 19.3
BSE Bankex349 17.2
BSE IT277 24.2
BSE CG276 34.7
BSE Realty270 35.8
BSE 100240 23.5
BSE Sensex228 22.2
BSE HC225 23.8
BSE Teck216 26.1
BSE FMCG193 29.9
BSE Power193 28.4
BSE O&G181 24.0
Data Source: CMIE Prowess

We shall now discuss the reasons for the indices performing the way they did over this period. But before we begin the discussion, we would like you to note that the performance of some of these indices may be on account of high weightage of certain scrips that is part of the index. The same holds true for reasons for the underperformance as well.

Below is an illustrative chart displaying the movement of seven indices - the top three sectoral indices (BSE-Consumer Durables, BSE-Metal and BSE-Auto), the top three underperformers (BSE-FMCG, BSE-Power and BSE-Oil & Gas) and the BSE-Sensex, since March 2009.

Data Source: CMIE Prowess
Before we move ahead, let us see how these very indices performed in the earlier period i.e. from the highs of January 2008 till the lows of March 2009.

Data Source: CMIE Prowess

Top performers
BSE-Consumer Durables: After being the top underperformer during the market correction of 2008, the BSE-Consumer Durables Index came back with a bang in 2009 and now in 2010. In recording gains of 300% from its lows of March 2009, this index is the top performer amongst BSE sectoral indices over this period. What is more, the price to earnings multiple (21 times) of the index as a whole is relatively lower than most of the other sectoral indices (as shown above).

It seems that interest in stocks forming part of this index further increased over the past few months as the interest and belief of investors - both domestic and foreign - in the Indian consumption story increased and strengthened.

BSE-Metal: The case for metal stocks is similar to that of the consumer durables stocks. After being amongst the top underperformers during the downfall of 2008, the BSE-Metal Index has been amongst the top performers since March 2009. With economic activity in the Indian markets making a better than expected recovery and also with the rising steel and aluminium prices, the prospects of the Indian steel makers seemed quite strong. However, the index has pared some of its gains in recent times on concerns over the situation in US and Europe. Concerns in metal majors, Hindalco and Tata Steel, which have maximum weightage in the index, have risen due to the same. Also, with the slowdown concerns looming in the US and European regions, factors such as China's built up capacity and a possible dumping into Indian markets seem to be factored into the price of metal stocks in recent times.

BSE-Auto: From January 2008 to March 2009, the BSE-Auto index dropped by approximately 55%. That was a time when the car makers themselves were expecting demand to take a long time to pick up. However, what has happened since then is there for everyone to see.

FY10 was one of the best years for the auto sector in terms of volumes and profitability. Lower interest rates, low base effect, stimulus packages by the government (excise duty cuts), lower commodity prices, strong demand from India's middleclass population - are just some of the many factors that led to a strong demand for vehicles - both two and four wheelers. In addition to strong domestic volumes, auto makers also got a boost from the strong increase in exports (to Europe). It has now reached a situation, where auto companies are facing difficulties in servicing the demand for their vehicles. On the back of the strong economic activity, the demand for commercial vehicles has also seen a strong rise in recent times.

Top underperformers
BSE-Oil & Gas: The BSE-Oil & Gas Index is the top underperformer amongst all sectoral indices with the same rising by 81% since March 2009. A broader reason for the same has been lower crude price, which averaged at about US$ 70 per barrel as compared to an average cost of US$ 85 in the previous year. Gas prices also have remained quite stagnant for a while now. Financial performances of index heavyweights such as ONGC and Reliance Industries have not been remarkable as they reported flat numbers in FY10 as compared to the previous year. It may be noted that the index would have been higher had it not been for the sharp decline in Reliance industries' stocks in the recent past. This reason for the same is seemingly on the back of the company making a few big acquisition announcements - including some in its non-core space.

BSE-Power: The BSE-Power index has also been among the worst performing sectoral indices since March 2009. It has gained about 93%, much lower than the gains in other key sectoral indices. This was largely a of investors' apathy towards these stocks, that were the darlings in 2007 and early 2008. Heavyweights from the sector, like NTPC and Tata Power did not perform well during the period, and the result was thus seen in the poor performance of the index. As far as the overall performance of power companies is concerned, while it has improved over the last few quarters, the improvement is not so prominent. Power companies continue to face execution delays in the expansion. And their profitability has also been volatile owing to uncertain fuel prices. We do not see the macro situation improving for the sector by a wide margin the coming quarters. The key issue will remain of improper availability and pricing of fuel resources.

BSE-FMCG: After outperforming the broader markets (the BSE-FMCG Index dropped by only one-fourth) in 2008 on the back of investors taking a defensive investing approach (since the Lehman Brothers bust), this index has emerged as the top underperformer since March 2009. While high valuation is one obvious reason, there are certain concerns that are looming over the index as a whole. Factors such as the subpar monsoon in 2009 resulted in higher cost of raw material for FMCG companies. In addition, the increase in competitive intensity and high food inflation, which threatened volume growth, forced the FMCG companies to absorb the rise in input costs. This effectively took a toll on profitability as it put pressure on margins in the recent quarters resulting in the recent subdued performance on the bourse.

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