Markets: Who won? Who lost?

Source: Equitymaster.com

The Indian stockmarkets indices have been on a record run with the latest one being the Sensex crossing the 10,000 mark and having moved higher into a newer orbit. Investors belonging to every segment – FIIs, retail investors and mutual funds – have continued to pump in money even at these levels. Every word of caution even by the most experienced of players in the market has been proved wrong, at least for now.

However, whatever said and done, one must not forget that extreme price swings are the norm of capital markets and that price movements do not follow the well-mannered bell curve assumed by some. In fact, the pattern followed by them is generally rather violent, which increases as the markets go higher. This makes an investor’s ride much bumpier. However, at the same time, long term and disciplined investors would have managed to avoid these bumps and temporary heartburns, as the long-term trend of the markets have remained upwards and is expected to remain northwards over the next 3 to 5 years. With the above backdrop, let us now consider which sectors outperformed the benchmark index and which others lagged it in the last 1-year.

Index As on Feb 5 2005 (Rs) As on Feb 6 2006 (Rs) % Change
Consumer Durables 1,453 3,148 116.7%
Capital Goods 2,990 5,732 91.7%
FMCG 1,123 1,741 55.0%
BSE Sensex 6,565 10,085 53.6%
IT 2,579 3,749 45.4%
Bankex 3,674 5,254 43.0%
Teck 1,708 2,313 35.4%

It must be noted that most of the consumer durable companies use steel as their raw material and since these witnessed a significant correction during the year, the pressure on margins eased, inturn increasing profitability. Also, India being an agrarian economy and with a significant part of the population dependent on monsoons, which were good in 2005, the demand for consumer durable items have got a leg up. Also, exports increased significantly and accounted for a major chunk of these company’s total sales.

As far as the capital goods sector is concerned, the realisation of the necessity of world-class infrastructure for unleashing high and sustained economic growth and alleviation of poverty have benefited engineering companies immensely. Apart from highway development and construction and modernisation of airports, the potential for the sector lies in the oil and gas space, where high global demand has led to heightened activity in exploration and production activities.

For the FMCG sector, one has to remember that it is a play on ‘India’s consumption potential’. The sector is back on track and is on the path to recovery. Growth is being witnessed in urban as well as rural areas. However, this time around, smaller companies have walked away with larger gains as they follow a simple strategy, give the retailer higher incentives than those given by larger brands thus encouraging the retail shop owner to push their products more. Further, almost all companies have set up units in tax havens like Himachal Pradesh, Uttaranchal and Assam, which offer them a 100% 10-year tax and 5-year excise benefit. The year saw the implementation of VAT, a shot in the arm for organised players, as brands will become cheaper in times to come. Also, owing to this, smaller and unorganised players might lose the competitive edge, which in turn will benefit organised players.

Having considered the reasons for the outperformance of certain sectors in the last 1-year and despite the going looks good in the future, investors should have a cautious approach towards the companies and should make prudent investment decisions depending on the companies’ management and valuations. Although, the potential for growth in the long term is immense, at present, the valuations of many companies seem to be stretched. From here on, the emphasis on risks has to be higher than earnings prospects. As somebody once said “there is always a second time in the stock market”.

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