Monday, June 23, 2008

Sectors To Invest & Avoid Now! -June 23, 2008

With inflation at where it is, the stock markets in an unwind and corporate costs soaring spawning a slowdown, how do the sectors look in terms of investibility? DNA Money’s Pallavi Pengonda and Rabin Ghosh give you a quick take:

Consumer durables expected to underperform in the medium to long term as rising inflation will reduce affordability, increase consumer downtrading to lower-priced, low-margin products even as input costs rise. Also, interest rates on loans will rise, curtailing demand afresh.

FMCG :A defensive but dicey play. Rising inflation will increase input costs but good monsoons will boost rural income and spur demand. But current valuations are high, and downtrading by consumers is a risk. On the whole, the sector is neutral to positive in the medium term.

Information technology: Positive in both the medium and long terms. If US enters Recession St, offshoring can only increase. The need for technology in emerging markets is rising, as are compliance needs globally, which require more investments in IT systems. Dollar is a key variable, but is seen stable for now. Both India and US go into elections but not many policy changes are expected.

Auto negative in the short and medium terms: The sector is entering a cyclically lean phase and interest rate hikes, higher oil prices, tighter lending norms and rising input costs exacerbate the troubles. There is concern across vehicle segments — passenger cars, commercial vehicles and two wheelers. In passenger cars, growth is expected to also slow down on account of a changed excise duty structure for medium-sized cars, which piloted the sector last year.

Healthcare and pharma: Being quite insulated from macroeconomic factors such as inflation, input cost pressures, oil, and interest rates, they are among the best defensive sectors. In the short to medium term, the impact on the sector will be neutral to positive, while from a mid to long-term perspective, things are positive.

Power: Attractive in the short term, negative in the long term. The stocks are commanding a high price-earnings multiple. Analysts expect government to hike power tariffs in the hope that it slows down industrial production. Hence, companies will show profits for now, but long-term profitability will be affected.

Aviation: Negative for, as far as you can see because capacity is far in excess of demand and jet fuel prices don’t look like ebbing anytime soon. Demand is also expected to slow down since business travel will be reduced as corporates cut back on costs.

Banks: Negative in the short to medium term because of sentiment overhang such as likely mark to market losses, rising delinquency, and credit slowdown. Positive in the medium to long term since the sector has been beaten down and there are stocks available at attractive valuations (some even less than one-time book value). Cost of funds is expected to decrease due to increased money flow from the capital markets to the banking sector assuming that markets remain in a bearish phase. Also, with foreign banks entering next year, any steep fall in private sector banks’ valuation will create acquisition targets.

Metal: Negative in the short term and positive in the long term for both ferrous and non-ferrous. But if global prices fall, margins will be hit. In the near term, ferrous metals would come under government curbs and consumption of non-ferrous metals will slow down, leading to a weakening of prices. Integrated metal companies with their own mines will do far better than others.

Realty: A pariah in the making. Expected to remain weak in the medium to long term. Expect further price erosion as the market starts discounting landbank net asset values from a premium now. Higher interest rates, indecisiveness among buyers, fall in prices and demand will keep stock prices in check. But analysts say if the broader market rebounds, so will this sector.

Oil & Gas: Private sector companies look attractive since their public sector peers have been emasculated with no pricing power. Exploration and production entities are better placed than oil marketers, but even they will be impacted to the extent of sharing of some subsidies provided to the oil marketers. If crude declines to around $100 per barrel, the sector could perform better because there would be a bounceback in demand.

cement: Negative in the medium to long term. There is a steep rise in input costs such as power, freight and coke and then there is the government-induced price control and export curbs to contend with. A further weakening of prices is due next year as major capacities come on stream and demand may not rise proportionately.

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