A look into the performance of BSE Sensex companies since 2008 reveals that IT, Pharma, FMCG and auto sectors have generated substantial returns irrespective of the economic growth of the country, while some have always been losers - Tata Motors, Sun Pharmaceuticals Industries and Tata Consultancy Services (TCS) shares are amongst the winners
The growth in gross domestic product (GDP) for the quarter ended June 2013 hit a four-year-low of 4.4 per cent. This was much lower than market expectations and also in sharp contrast to the growth rate of 9.3 per cent that the economy registered just two years ago in 2010-11.
On the back of a strong economic growth, net inflows from Foreign Institutional Investors (FII) was Rs 133,266 crore during the calendar 2010 and sentiment was on a high, the year saw BSE Sensex closing at an all-time high of 21,005 at the Muhurat trading on November 5, 2010.
Contrary to the situation in 2010-11, the economy is now witnessing a slowdown. Indian rupee is trading at much depreciated level of 65 to the US dollar, net FII inflow for the calendar at Rs 61,051 crore (as on September 6) and sentiments in the equity market are on a low. But even in the two contrasting environments there are sectors which have performed consistently on the stock market front.
In 2010, companies in the IT, pharma, FMCG, banking and auto sectors did well at the stock exchanges whereas those in the power, metal, capital goods and oil and gas sector trailed in performance. The situation is not different now, and companies in the same sectors continue to drive the market even as the economic fundamentals and environment are significantly different than they were in 2010 with the exception of banking that is reeling under currency pressure.
In the calendar 2010, among the Sensex companies, Tata Motors rose by 89 per cent while Sun Pharma and TCS were up by 61 and 55 per cent respectively. However, in the same period Sesa Goa and NTPC were down by 16 and 15 per cent respectively. Even Bharat Heavy Electricals Ltd (BHEL), Tata Power and Reliance Industries (RIL) generated negative returns.
The trend has been on similar lines since 2008. A look into the performance of Sensex companies since beginning of 2008 reveals that companies in metal, power, capital goods and oil & gas have been clear losers while IT, Pharma, FMCG and auto have generated substantial returns for investors in the same period.
As a result of the same there has also been a notable change in the pecking order of Sensex companies. While NTPC, ICICI Bank, BHEL, SBI and L&T do not figure in the top 10 companies by market capitalisation now, they have been replaced ITC Ltd, HDFC Bank, Hindustan Unilever (HUL), Wipro and HDFC Ltd.
What does it signify?
The company’s financial performance remains key to a stock’s performance and stock markets track future earning of companies. While earning expectation for companies in the power, metal and infrastructure sector remained weak and deteriorated over the last few years, the situation has not witnessed any improvement even now.
“The forward earning expectation for power, infrastructure and metal companies has shown no improvement and the growth has been coming from companies in the IT, pharma and FMCG sectors as they have sustained their earning growth,” said Rikesh Parikh, VP, market strategy and equities at Motilal Oswal Financial Services.
Market participants expect that IT, pharma and FMCG to continue with their performance in the current environment of slow growth and uncertainty.
“While IT companies benefit from an uptick in the US economy and depreciation in rupee, FMCG and pharma, being defensive sectors, will not see a slowdown in growth even as the economy slows,” said Alex Mathew, head of research at Geojit BNP Paribas Financial Services.
So does that mean you should stay away from power, infrastructure and metal companies?
Things are uncertain now and so even as most of the stocks within these sectors are available at significantly low valuations experts are not yet sure whether they have bottomed out.
While metal prices are flat, government has not come out with any clear visibility on infrastructure and power projects. Several projects may have received approvals over the last few days by the Cabinet Committee on Investments, experts feel that it may still take some time for them to come on ground.
“It will take some time before we know that stocks in these sectors have bottomed out,” said Parikh.
Mathew, however, feels that there are some good companies that can be bought for the long term when the market corrects.
“Sectors like power, metals and infrastructure are directly linked to the economy and the economy will not continue to stay the same. Investors can look to invest in well run companies such as Tata Steel, Hindalco for the long term,” said Mathew.
The curious case of IT
The recovery in the US economy has come as a big booster for the IT sector. A depreciation in the rupee by over 20 per cent over the last four months means higher revenues and better margins for these companies.
TCS has been the biggest gainer this calendar. Its shares have risen by almost 60 per cent this calendar. Infosys and Wipro too have gained 31 per cent and 22 per cent respectively in the same period. While the stocks have had a sharp run experts feel that the prospects remain bright for the IT companies as a pick up of growth in the US economy will lead to more business and growth for the IT majors.
“The growth in IT companies are hinged on two things, a broadbased recovery in the US and increase in penetration in Europe,” said Abhishek Shindadkar, IT analyst at ICICIdirect.
While TCS has risen by 271 per cent since 2008, growing at a compounded annual growth rate of 37 per cent since then, it only lags behind Sun Pharma among the Sensex companies in terms of performance. Sun Pharma has grown by 341 per cent in the same period. Experts say that TCS is one stock that investors should hold in their portfolio for the long run. “TCS is good performing stock with strong fundamentals and is expected to do well in the long run,” said Mathew.
With the recent run at the stock markets, TCS has surpassed the aggregate market capitalisation of the other four IT majors in the country — Infosys, Wipro, HCL Technologies and Tech Mahindra, but experts feel that the stock deserves the premium and is not overvalued.
“TCS has several factors working for it. It is getting a bigger share of revenue in big deals where several global players such as Accenture and IBM are involved and it is getting more long-term projects. Its business is well spread across various geographies,” said an IT expert who did not wish to be named, as he works as a consultant with leading IT companies.
“For TCS the positives outweigh the negatives and while entry may be key, from a long-term perspective investors may start to accumulate with a staggered approach,” said Shindadkar.
However, there are others who feel that investors should not chase past returns generated by the company. “It is a quality company that has sound track record and has sustained even in adverse environment. Investors should look to hold the stock for 5-10 years,” said Parikh.