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Markets: What's hot, what's not! - Views on News from Equitymaster
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  • Dec 18, 2006

    Markets: What's hot, what's not!

    The last five trading sessions seemed like a roller-coaster ride for participants in the Indian equity markets. And why not! The benchmark, BSE-Sensex, which declined by almost 800 points in the trading sessions of Monday and Tuesday, saw a 'resurgence' of 620 points in the next three, thus ending the week with 'only' a 185 points decline over the closing of the earlier week (ended December 8, 2006). In fact, the volatility of the last week was a sort of follow-up of what we have been witness to on the Indian bourses in the past twelve months - frantic volatility, and more of that!

    In this article, we peek into the past 12 months and gauge over the performance of the leading sectoral indices on the BSE. We analyse the reasons for a sector's outperformance of the benchmark (Sensex) as also the causes of the other's non-performance.

    BSE indices: The year that was!
    BSE Indices 15-Dec-05 15-Dec-06 Change Mkt. Cap * Share in total
    Cap. Goods 5,616 9,224 64.3% 2,008 5.7%
    BSE-Sensex 9,170 13,615 48.5% 17,316 49.0%
    IT 3,645 5,182 42.2% 4,067 11.5%
    Banking 4,941 6,995 41.6% 2,853 8.1%
    Oil & Gas 4,229 5,974 41.3% 4,578 13.0%
    Metal 6,309 8,803 39.5% 1,878 5.3%
    Auto 4,180 5,262 25.9% 1,733 4.9%
    FMCG 1,601 1,952 21.9% 1,713 4.9%
    Healthcare 3,086 3,702 20.0% 1,324 3.8%
    PSU 5,259 5,968 13.5% 7,277 20.6%
    Consumer Durable 3,161 3,403 7.7% 181 0.5%
    India - Mkt. Cap.* 35,312  
    India - GDP*       34,200  
    * Rs bn
    Source: BSE, Equitymaster Research

    Outperformer - Capital goods
    The capital goods sector, which is one of the most closest to benchmark an economy's industrial growth and infrastructure development, has been the biggest gainer from amongst its sectoral peers on the BSE. And why not! The sector has been witness to tremendous growth over the past few quarters, owing to large scale infrastructure spending that has directly flowed into companies' order books and topline. And the financial performance has been mirrored on the stock markets. The major beneficiaries have been those who are focused on the power (generation, transmission and distribution) sector.

    With the recent string of reforms in the Indian power sector, the sector is expected to grow at a rapid rate going forward. As per the commissioning programme, till March 2010, an aggregate generation capacity of 43,865 MW is expected to come on stream (see Table 1). The government has also indicated of a projected capacity expansion of 67,000 MW in the 11th five- year plan (2007-12). While not taking these numbers on face value and giving due respect to the slow historical growth in generation capacity in the country, we are still of the view that the progress in the future will be more rapid than what we have witnessed in the past.

    As far as the other segments of capital goods are concerned - infrastructure construction, hydrocarbons and process industries - growth will be a factor of greater capacity addition and increased private-public participation.

    Outlook for the capital goods sector
    World-class infrastructure has emerged as one of the most important necessities for unleashing high and sustained growth and alleviation of poverty in any economy. And with poor infrastructure to support other growth initiatives, the Indian economy continues to be a laggard when compared to its developing peers. From a policy perspective, however, there has been a growing consensus that a private-public partnership is required to remove difficulties concerning the development of infrastructure in the country. The realisation finally seems to be setting in. Considering these factors, we expect the sector to grow strongly into the future. However, scale and execution capabilities will be the key mantras for success for the engineering companies.

    Underperformer - Healthcare
    On the back of some serious price erosion in the US generics market and slow growth in product launches from MNC companies, underperformance of some of the leading pharma companies led to the overall slack performance of the BSE Healthcare index during the past year. This can be attributed to the increasingly tough conditions in global generics market due to rise in the level of competition and severe price erosion. Besides, the domestic market has not been spared from competition either, as can be evinced from the fragmented nature of the industry.

    Outlook for the healthcare sector
    While the fundamentals driving the generics market continue to remain strong, the brutal pricing environment is a cause for concern. It must be noted that the competition has tremendously increased, escalating the extent of price erosion. Having said that, while the competition most probably will show no signs of abating, a considerable rise in the patent expiries of blockbuster drugs in the coming years is likely to provide a breather to generic companies and boost revenues. The ability to manufacture drugs at the cheapest cost and leverage one's marketing and distributing network to increase reach will be the key to survival.

    We also believe that partnerships are likely to play a crucial role in driving growth. This could be in generics (contract manufacturing, authorised generics) or research (R&D collaboration, contract research, out-licensing of molecules) or custom manufacturing for innovator companies. In the domestic market, with the introduction of the patent law and subsequent slowdown of product launches, albeit at a gradual pace, companies entering into in-licensing agreements with innovator companies will have the upper hand. This will ensure a steady flow of product launches in this market. For MNC companies, while new product introductions from their parent's folio will be the key to success going forward, in our view, it is unlikely to be a cakewalk for them. This is because prices of these patented products will most likely be subject to 'price negotiation'.

    So, what next?
    Benjamin Graham once said, '...in the short term, the market is a 'voting' machine whereon countless individuals register choices that are product partly of reason and partly of emotion (consensus). However, in the long-term, the market is a 'weighing' machine on which the value of each issue (business) is recorded by an exact and impersonal mechanism (fundamentals).'

    Despite the current volatility, we maintain long-term (3 to 5 years) positive stand on the India growth story. Earning a compounded annual return of 15% from a well-balanced equity portfolio should not be a difficult task during this period. However, asking for more than that, say 20%, 30% or 50%, will be like asking for the moon.



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    Aug 24, 2017 03:36 PM