As the inflation rate moves up, key market indices are spiralling downward. Is there a way of making sure that your portfolio is not affected by this rising rate? As far as your existing holdings are concerned, we suggest that you do nothing for the time being, going by the market adage, “when in doubt, sit it out”. When it comes to fresh investments, however, make sure you look at the sectors and companies that are relatively insulated from wider market and economic movements. R. Sree Ram finds that the IT sector and pipe manufacturers are likely to be good bets. Our columnist Dipen Sheth looks at the sectors that are expected to take less of a beating—healthcare, consumer goods, infrastructure and capital goods. Finally, Narayan Krishnamurthy explores the options for investors in debt and fixed-income instruments in this scenario and looks at the choices before senior citizens, possibly the worst hit segment of the population.
The Indian equity market is going through one of its roughest patches ever. Equity indices have been in a free fall over the past few weeks; the benchmark Sensex has lost 32% since the beginning of the year. Worse, most of its component indices have done equally badly— the BSE Realty Index lost 62%, while the BSE Automobile Index fell 35%. Strangely, there is some good news. Not all sectors and industries have been hit by the rising rate of inflation. We take a look at a couple of sectors that have managed to do well regardless of the state of the economy.
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Auto: Rising interest rates on loans are keeping some buyers at bay. High input costs, especially of steel, leaves no headroom for pricing power, especially when sales are shrinking
Banking: Rising inflation will drag down consumption and the slowing economy is likely to dampen credit growth
Real estate: Problems are largely on the funding front. Apart from this, potential buyers are deferring their buying decisions in light of high mortgage rates and depleting property values
Utilities: The long gestation period for project implementation has left companies vulnerable to cost escalation
The IT sector is expected to register a sequential growth of 7-8%. While on the face of it, this might not seem like a hugely attractive rate, it’s virtually irresistible when most other sectors are reporting a sequential decline in earnings. “The Indian IT industry is driven by international demand. It has nothing to with domestic inflation or any of the domestic factors,” says Ravi R., IT analyst at Karvy. Large-cap stocks such as Infosys Technologies, Tata Consultancy smaller ones like HCL Technologies and Rolta India are regarded as good bets in this sector. Analysts expect the IT industry to witness a fresh influx of orders after September as bigger clients have delayed due to tight liquidity conditions.
The high prices of crude have worked in favour of line pipe companies such as Welspun Gujarat, Jindal Saw and PSL. These companies manufacture pipes that are widely used to transport crude oil, and are well-positioned to explore the robust investments being made in extracting and transporting new crude (and now, gas). “With crude oil prices hitting $140 a barrel, tremendous investments are being made in the oil and gas sector,” says Chintan Mehta, analyst, Asit C Mehta. The order books of most of these companies are full for the next year. On the cost front also, pipe manufacturing firms are in a position of strength as they lock in raw materials at pre-set prices when they receive the orders.
Right now, Dalal Street is in the throes of capitulation. And any stock, howsoever sound its fundamentals, is vulnerable to this. The very people who found nothing wrong with India’s economy are suddenly prophesising economic doom. Their favourite country is buckling, as it were, under the pressure of high oil prices, gut-wrenching inflation, tight money and loose coalition politics.
So how do we invest in these troubled times? Sellers are hammering the living daylights out of bad, average and absolutely wonderful stocks day after day. And yet, this is exactly the kind of opportunity that deep-value investors fantasise about. We should be happy. Respectable frontliners will soon be available at half the valuations that dubious mid-caps once used to command. This is the time when absolute value becomes compelling and easy to find, when good to great businesses get sold for a song and when “investing for the long term” becomes feasible instead of just being a catchy slogan.
That’s why I think we can unearth a few nuggets of hope under the mountains of despair. We can actually become sensibly greedy when others are fearful, perhaps idiotically so.
But first, the bad news. There’s no denying the trouble, and it’s serious. The oil-induced fiscal deficit, the global meltdown of asset prices in the face of ever-tightening money supply, worldwide inflation, the slowing down of investment and growth as well as the paralysis of governance in an election year in India.... Commodities continue their upward spiral, while hardening interest rates squeeze out profits and kill credit demand. India’s virtuous economic cycle is seriously threatened, it seems.
The good news is that the bad news is widely known and acknowledged. By which I mean that there’s little by way of additional nasty surprises that are likely to come up in the foreseeable future. This is, therefore, an excellent time to identify some investing themes to steer troubled portfolios out of the current turmoil. The only caveat I can think of is that the market can continue to dither (and test our patience) even after the bad news flows out completely. Or that the results over the next few quarters will be far worse than feared. And, of course, something “big and devastating” might happen out of nowhere, but that’s a standard risk we run even during better times.
Infrastructure & capital goods
No matter which party comes to power, there is universal agreement on spending more on roads, transport networks, irrigation, dams, power plants, transmission networks, ports and airports. The obvious proxies to gain from this spending are L&T (down 60% from its peak), Punj Lloyd and Nagarjuna Construction. For the gutsy contrarians, it’s deep discount season in cement, as Grasim, Ambuja, Madras Cements and India Cements crash to oneyear lows. And let’s not forget the once over-owned capital goods stalwarts like Bhel, Suzlon and Welspun Gujarat.
Safe haven-seekers can find solace in industry-leading, cash-rich multinationals like Esab India, SKF India, ABB, Areva T&D and FAG Bearings, which are all going at less than half their recent peaks.
Consumer goods and services
Most Indians are currently fighting a losing battle against inflation. So who’s going to spend more? India’s more than a billion people, that’s who. This sea of humanity is growing daily, and aspiring for a better life. Remember, India and China are possibly the last two mega-clusters of humanity that are still to achieve even the basic consumption levels by “western” hemisphere standards.
So, spending is bound to continue. FMCG leaders such as HUL, Nestle, Glaxo Consumer, Castrol, Asian Paints and Britannia offer safety plus growth. Unlike the capital goods and construction sectors, you may not get serious capitulation here. In fact, these stocks are seen as safe havens and might actually rise during some of those gut-wrenching days when the market is raining lower circuits.
Apart from consumer goods, telecom rings hope in spite of falling ARPUs and tighter margins, simply because prices are falling for consumers and many, if not most, costs are also falling for operators. I’d vote for scale in this high fixed-cost industry: Bharti and RelComm score over Idea-Spice and Tata Teleservices any day.
Media stocks offer renewed hope after crashing from their overhyped valuations. Possible candidates: TV18, Adlabs, Zee, UTV Software, Deccan Chronicle. But I’d wait for better (read, worse) times to buy most of these worthies.
Pharma companies have swung back in favour even as the rest of the market has tanked over the past six months. Given the industry’s complexity, it’s difficult to comprehend the changing prospects and predict earnings growth with any confidence unless one is a full-time pharma analyst. Still, it looks like the best is yet to come for Indian pharma companies as they battle innovators, step up their generics presence and move up the value chain in contract research and manufacturing (CRAMS).
Divi’s Labs, Dishman and Jubilant are CRAMS leaders with several years of growth prospects in the pipeline. Ranbaxy’s promoters have sold out to Japanese innovator, Daiichi. Sun Pharma is playing out an interesting battle with Israeli generic player, Taro.
Finally, it’s possible to dig for value in the “more injured” spaces like energy, banking, power and metals. But given the fresh waves of selling on the street, I’d much rather wait for a “final capitulation” in these sectors, which will give me a chance to make a short-list of even more investing ideas. For times that will seem even worse than today. Wanna bet?
Dipen Sheth is head of research, Wealth Management Advisory Services. He can be reached at email@example.com