Sec­tors To Watch Out For

Dalal Street Investment Journal - - SPECIAL REPORT -

There could be very many meth­ods of choos­ing right stocks for long-term in­vest­ments. One of the most cor­rect ways of choos­ing a right stock is to first iden­tify a sec­tor that is show­ing strength. Once an in­vestor iden­ti­fies right sec­tors that are show­ing strength the prob­a­bil­ity of mak­ing good re­turns in­creases con­sid­er­ably. Sec­toral anal­y­sis is key to in­vest­ing suc­cess. We hereby present anal­y­sis on two such sec­tors that are ex­pected to grow im­pres­sively. In­vestors can look at in­vest­ing op­por­tu­ni­ties in th­ese two sec­tors for com­ing year.

Sec­tor Anal­y­sis: Au­to­mo­bile

Com­mand­ing a growth rate of 11 per cent dur­ing the Jan-may 2017 pe­riod when the econ­omy was still reel­ing from the im­pact of de­mon­eti­sa­tion, the In­dian au­to­mo­bile in­dus­try boasts of be­ing the third largest au­to­mo­bile in­dus­try in the world. The sec­tor has wit­nessed a slew of ma­jor launches in 2017 and the mar­kets are await­ing more launches by au­to­mo­bile gi­ants such as Ashok Leyland, Ford Mo­tors, Mahin­dra & Mahin­dra and Re­nault.

The sec­tor has been privy to sig­nif­i­cant re­forms through­out the year, in­clud­ing the un­prece­dented or­der by the Supreme Court ban­ning the sale of BS-III ve­hi­cles from April 1 on­wards and the GST roll-out. How­ever, the sec­tor has fared well and is reap­ing strong fi­nan­cial earn­ings.

While most of the econ­omy is grap­pling with the short term slow­down brought about by the GST roll-out, the auto sec­tor has by far largely ben­e­fited from the GST roll-out. The low­ered cost of pro­duc­tion post the im­ple­men­ta­tion of GST has spurred the pro­duc­tion ca­pac­ity of the auto sec­tor, also ap­peal­ing to the in­ter­na­tional auto man­u­fac­tur­ers as an out­sourc­ing hub.

The gov­ern­ment of In­dia is ex­clu­sively fo­cus­ing on the elec­tric car seg­ment in a bid to meet its emis­sion re­duc­tion tar­gets. Un­der the Na­tional Elec­tric Mo­bil­ity Mis­sion Plan, the gov­ern­ment aims to sell only elec­tric cars by 2030 and has thus in­cen­tivised the elec­tric car seg­ment with a sub­sidised tax rate un­der the GST regime. The grow­ing in­cli­na­tion of auto gi­ants to­wards elec­tric cars, backed by the gov­ern­ment’s com­mit­ment to the cause, is soon likely to re­sult in a slow yet grad­ual shift in the sec­tor from fuel-driven ve­hi­cles to elec­tric ve­hi­cles.

In the month of Septem­ber, the sales of do­mes­tic pas­sen­ger ve­hi­cles rose by

11.32 per cent, car sales in­creased by 6.86 per cent, mo­tor­cy­cles sales jumped by 6.98 per cent and com­mer­cial ve­hi­cles grew by 25.27 per cent, ac­cord­ing to a data re­leased by SIAM.

On the stock ex­change, on a year-to-date ba­sis, S&P BSE Auto in­dex has recorded a re­turn of 21.36 per cent, sur­pass­ing the 19.48 per cent re­turn from S&P BSE Sen­sex. While auto ma­jor Maruti Suzuki posted a 48.57 per cent YTD re­turn, Bharat Seats with 156.46 per cent YTD re­turn, be­came the top most auto stock in terms of re­turn gen­er­ated for the pe­riod. The other auto stocks that surged the most on the bourses dur­ing the cor­re­spond­ing pe­riod were Tal­bros En­gi­neer­ing (135.1 per cent), Minda In­dus­tries (124.75 per cent), Sharda Mo­tor In­dus­tries (101.58 per cent) and PPAP Au­to­mo­tive (94.83 per cent).

The au­to­mo­bile sec­tor is likely to drive the growth rate of the econ­omy in the

fu­ture. The sec­tor is look­ing for­ward to a strong growth mo­men­tum on the back of fes­tive sea­son in the short term and a ris­ing in­come and grow­ing mid­dle class and youth pop­u­la­tion in the long term per­spec­tive, mak­ing auto stocks the buzzing in­vest­ment choice.

Sec­tor Anal­y­sis: Metal

The fi­nan­cial year 2016 was a for­get­table year for the metal in­dus­try with most com­pa­nies re­port­ing huge losses. How­ever, had you taken a con­trar­ian bet on metal stocks last Di­wali, you would be grin­ning from ear to ear since the metal sec­tor stocks turned out to be the sec­ond fastest grow­ing stocks over the last one year.

The slow­down in the met­als sec­tor was ma­jorly due to drop in metal prices in Lon­don Metal Ex­change (LME), lower de­mand in the do­mes­tic mar­ket re­duced mar­ket share due to Chi­nese im­ports. How­ever, the re­cov­ery be­gan in the sec­ond half of FY17. In Q3FY17, the top nine ma­jor metal com­pa­nies made a cu­mu­la­tive profit of around Rs 5,900 crore as against a loss of Rs 1,000 crore dur­ing the same pe­riod a year ago. In the non-fer­rous space, a strong re­cov­ery in the LME prices has led to an im­proved earn­ings out­look.

Apart from the re­cov­ery in prices, fall­ing in­put prices have also helped the prof­itabil­ity of com­pa­nies, since the raw ma­te­rial ex­pense makes up to 45-60 per cent of the over­all costs for com­pa­nies in the met­als space. Fall­ing cok­ing coal prices au­gured well for do­mes­tic steel com­pa­nies that are de­pen­dent on im­ported cok­ing coal.

There has been an in­creased avail­abil­ity of cok­ing coal as myr­iad mines have been re­opened in Aus­tralia, Canada, the US and Mozam­bique, which in turn, has led to the fall in prices in China. Con­sid­er­ing no ma­jor de­mand push or sup­ply con­straint, prices of cok­ing coal are ex­pected to stay at the cur­rent lev­els. Also, the anti-dump­ing on steel prod­ucts, which has been levied for a pe­riod of five years, will pro­tect the do­mes­tic steel in­dus­try from im­ports com­ing from China and other coun­tries.

Since Di­wali last year, the stock of Gravita In­dia Ltd, a lead­ing player in the man­u­fac­ture and ex­port of lead, has gone up by more than 328 per cent, while the stock of Shiva­lik Bimetal Con­trols Ltd, a com­pany spe­cial­iz­ing in the join­ing of ma­te­ri­als, has gained by 263 per cent. Vedanta Ltd, a lead­ing com­pany in zinc, lead, sil­ver, alu­minium, cop­per and iron ore, reg­is­tered a 44.78 per cent rise. Bhagyana­gar In­dia Ltd, a com­pany deal­ing in cop­per prod­ucts, gave 44.92 per cent re­turns to in­vestors. Among wire and cable com­pa­nies, Ram Ratna Wires Ltd and Bharat Wire Ropes Ltd gave re­turns of 146 and 68 per cent, re­spec­tively.

Ac­cord­ing to the World Steel As­so­ci­a­tion (WSA), the steel de­mand in In­dia will be the high­est for both 2017 and 2018 among ma­jor steel con­sum­ing na­tions. In 2017 and 2018, In­dia’s steel de­mand is ex­pected to grow by 6.1 per cent and 7.1 per cent, re­spec­tively. Also, the top nine listed metal com­pa­nies are ex­pected to record an av­er­age an­nual earn­ings growth of around 40 per cent dur­ing 2017-19.

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