 "Metal, oil & gas sectors see sharpest rally in 7 yrs")
Oil & gas and metal sectors are set to post their biggest yearly gain since 2009, when they had rallied 73 per cent and 234 per cent, respectively. Thus far in 2016, both indices have gained 26 per cent and 40 per cent, respectively, compared with a 0.98 per cent rise in the benchmark – the S&P BSE Sensex till Monday.
On the other hand, classical defensive plays such as information technology and pharmaceuticals have recorded a negative return of nine per cent and 11 per cent, respectively, while consumer durables and real estate sectors lost nine per cent and five years, respectively, on a year-to-date basis.
Among individual stocks, Hindalco Industries and Vedanta from the metal pack have become multi-baggers, gaining 100 per cent in 2016. Hindustan Zinc (84 per cent) and Tata Steel (58 per cent), too, surged more than 50 per cent thus far in the current calendar year.
Indraprastha Gas, Hindustan Oil Corporation and Petronet LNG from the oil & gas pack surged between 52 per cent and 72 per cent during the year.
As regards metals, analysts say the global rally has been driven by a surge in raw material prices (iron ore and coking coal) due to temporary supply issues and not by a structural improvement in demand.
“While it is difficult to estimate the timing of normalisation of supply (until which iron ore and coking coal prices could remain elevated and domestic steel prices could see some short term increase), prices should trend lower in the longer term. Moreover, we do not see any meaningful lift to global steel demand outlook even if the recent ado about US/Japan increasing infrastructure investments is implemented,” points out a recent research note on the sector from Ambit Capital.
Ashish Kejriwal, an analyst with Elara Capital remains positive on Hindalco and Vedanta. With aluminium producers focusing on cutting cost, he expects companies’ profitability to improve going ahead.
Defensive plays
Despite the H1-B visa-related issues in the wake of Donald Trump’s victory in the US Presidential elections, analysts remain positive on the IT sector given how the rupee-dollar equation may pan out going ahead. A depreciation in currency would help the Indian IT companies improve their margins significantly. Pharma stocks, however, could underperform given US Food and Drug Administration (FDA)-related issues with Indian pharma companies.
Metal, oil & gas sectors see sharpest rally in 7 yrs
“We acknowledge the risk/concerns on Indian IT under Donald Trump presidency and a possible tightening of the Visa regime. We note that Indian IT has taken steps to reduce dependence on Visa in the past few years and inched up local hiring in the US. This will mitigate the impact of any possible changes in Visa regulations,” says Sandip Agarwal, an analyst tracking the sector with Edelweiss Securities.
Consumer durables and the real estate sectors would continue to remain under pressure in the near- to medium-term given the impact of demonetisation.
Fitch Ratings expects the credit profiles of most home builders to weaken as slower sales could mean cash collections will lag construction commitments. This would be particularly true for companies that have aggressively expanded their land banks in the past two years, using cash collections from previously sold properties. On the other hand, companies that have liquidity to complete their projects within the next three to six months might be temporarily insulated from the shock.
“Stability could return to the sector and improve credit profiles if there is a resurgence in demand for residential property. However, we believe this will have to be preceded by a sharp reduction in property prices (possibly over several years) combined with a slowdown in new property launches, which could lead to less unsold inventory,” point out Hasira De Silva and Snehdeep Bohra of Fitch in a recent report.
