Analysts bank on core stocks to cover swings

With stock movements uncertain in the near-term, analysts are pinning hopes on construction, cement, and infrastructure related sectors for better long-term returns.

Analysts are viewing the slide as an opportunity for long term investors to enter fundamentally strong stocks.

"The slide is due to lack of liquidity and unwinding of leveraged positions," said Mihir Vora, head of equities at ABN Amro Mutual Fund.

"Nothing has changed fundamentally," he added. He was optimistic on infrastructure-related sectors.

Analysts are banking on India's gross domestic product expanding over 8 per cent in the next couple of years, and big spending on infrastructure.

Optimism on India has remained intact through the big market fall in the past month.

And that view was strengthened this week with industrial output surging 9.5 per cent in April compared with 8.2 per cent in March and 8.1 per cent a year earlier. The main driver was the manufacturing sector (10.4 per cent), especially capital goods (24.9 per cent).

Last week, CLSA, the French investment bank, identified Reliance Energy, Tata Steel, and Bharat Heavy Electricals among its value picks.

With government's focus on infrastructure, related sectors such as cement, construction, and engineering would gain and hence remain favourites, despite the recent steep fall.

Since the market peaked on May 11, the Bombay stock Exchange's Capital Goods Index had fallen 34 per cent to 5898.29. In the same roughly one month, Sensex plunged 29 per cent.

Big infrastructure investments this financial year include a 6.7 per cent increased outlay for the National Highway Development Programme to nearly Rs 10000 crore, additional Rs 5500 crore for Accelerated Road Development Programme and Rs 7350 crore for ports.

"Construction and engineering companies on the backdrop of infrastructure spending, swelling order books are likely to provide over 20 per cent returns (on stock investments) over the next one year," said Sonal Shrivastava, senior research analyst of Religare Securities.

Larsen & Toubro and Nagarjuna Constructions are his favourites in the sector.

However, on the downside, rising interest rates are likely to take its toll in the long term, as capital goods and engineering companies depend on loans to finance their big projects.

Most capital goods companies currently have over two times leverage, that is their debt is twice the equity, Shrivastava said. Cement companies shares could also gain on the back of 8-10 per cent rise in demand over the next couple of years while supply is seen increasing 5-6 per cent.

Construction activity in India is worth Rs 2.25 trillion a year and accounts for around 5-6 per cent of GDP. The economic expansion will fuel cement production and construction activity.

Although analysts were optimistic about infrastructure's fortunes, they caution all companies in this sector may not fare equally well. Selection remains the key to better returns, they said.