Investors in the stock market have been much more rational in the 100 days after Narendra Modi took over as the Prime Minister than they were in the heady days prior to the election results.
It is true that the Sensex and the Nifty are hitting new life-time highs and stock prices seem overheated. But a closer look at the sectors that have gained after the election results shows that the irrationality witnessed up to May 26 has given way to a more logical approach to stock selection.
Sectors such as infrastructure, power, real estate and metals that witnessed heady gains between September 2013 (when Modi was nominated the Prime Ministerial candidate of the BJP) and May 26, 2014, even as challenges remained on their ability to recover, witnessed declines, or at best, mild rallies. On the other hand, sectors such as pharma and IT that are continuing to show robust growth in earnings were the preferred choice after May.
The breathless 50 per cent gain in the BSE Midcap index and 69 per cent rally in the BSE Smallcap Index, too, moderated to 12 and 17 per cent, respectively. Investors cleverly churned their portfolio, hopping out of the riskier sectors into the safer defensive plays and export-oriented segments.
The sector index that has gained the most since Modi took charge is BSE Healthcare Index – with 36 per cent return. This index was an underperformer between September and May, gaining just 6 per cent.
Strong performance of pharma stocks with the June 2014 quarter earnings of front-line pharma companies growing at more than 20 per cent, driven by robust demand in the US and foreign exchange gains, has once again made this sector the market favourite.
The other strong performer among sector indices – IT – too delivered strong earnings in the June quarter. Net profit of the top IT stocks, including Tata Consultancy Services, Wipro, Infosys and HCL Technologies, recording a growth between 20 per cent and 50 per cent seems to have propelled the IT index 18 per cent higher since May. Preference for stocks whose earnings are linked to consumer-spends such as autos and consumer durables, too, rallied smartly.
Moving away from industrials Investors have prudently kept away from adding to the sectors that ran up before the election results on the hope that the Modi Government will cause an instantaneous transformation to economic growth by kick-starting stalled projects. While the Metal, Infra, Realty and Power indices gained 50-60 per cent in the pre-election rally, returns in these indices have ranged 0.5--5 per cent after the results.
Investors seem to have woken up to the risks in the banking sector, too, with the Bankex moving just 5 per cent higher compared with 54 per cent before the elections.
This shift implies a more mature market, since many stocks in these sectors are saddled with heavy debt and grappling with falling revenues and mounting losses.
One area of worry is the continuing rally in small caps. The BSE Smallcap Index rose 69 per cent in the pre-election rally and is up another 17 per cent since then. The trailing PE multiple has risen from 52 to 58 since May 26, implying that earnings have not caught up with galloping stock prices. This is one area where investors are still to curb the excesses.
Policy measures Has the Modi Government done its bit to help India Inc? It has, but there is no link between stock price moves and policy announcements. The move to ease infrastructure financing is a step in the right direction. Banks have been given flexibility in loan structuring and refinancing. Banks are also allowed to raise funds specifically for lending to infrastructure sector without regulatory requirements such as CRR, SLR and Priority Sector Lending targets. The Government has also carried on with speedier project clearances besides moving approvals for infrastructure projects online. It is a mixed bag for oil and gas companies on the policy front. Postponing the gas price hike does not send the right signal. While prices are expected to move higher, the quantum of price-hike could be moderate. Continuation of diesel price hikes is expected to wipe off the under-recoveries on the fuel soon. More domestic gas allocation for CNG and PNG also helps some city-gas distributors.
Airline companies have to put up with more competition with the Government giving the approval for six new airlines. Gems and jewellery companies got some respite with relaxation in the 80:20 rule on gold imports, but retention of the high customs duty on gold is still hurting.
Auto companies have benefited from the extension of excise duty cuts for all segments — two, three wheelers, cars, utility vehicles and commercial vehicles. Announcement of FDI in defence is a positive for capital goods stocks, though it will take some time to show in the bottom line.