Oil & Gas, Metal sectors see sharpest rally in seven years in CY16
On the other hand, classical defensive plays like information technology and pharmaceuticals have recorded a negative return of 9% and 10% respectively
Oil & gas and metal sectors are set to post their biggest yearly gain since 2009, when they had rallied 73% and 234% respectively. Thus far in 2016, both indices have gained 41% and 24% respectively, as compared to a 1.43% rise in the benchmark – the S&P BSE Sensex till Friday.
On the other hand, classical defensive plays like information technology and pharmaceuticals have recorded a negative return of 9% and 10% respectively, while consumer durables and real estate sectors lost 8% and 4.5%, respectively on year-to-date (YTD) basis.
Among individual stocks, Hindalco Industries and Vedanta from the metal pack have become multi-baggers, gaining over 100% in 2016. Hindustan Zinc (91%) and Tata Steel (59%) too surged more than 50% thus far in the current calendar year. Indraprastha Gas, Hindustan Oil Corporation and Petronet LNG from the oil & gas pack surged between 45% and 75% during the year.
As regards metals, analysts say the global rally has been driven by surge in raw material prices (iron ore and coking coal) due to temporary supply issues and not by a structural improvement in demand.
“Whilst 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 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 given 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 FDA related issues with Indian pharma companies.
According to analysts at Antique Stock Broking, the Indian IT industry after slowdown in revenue growth in CY16, is witnessing positive tailwinds from the improving US economy. Most noteworthy is the improvement in US financials, which is a leading indicator for Indian IT revenue growth.
“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’s in the past few years and inched up local hiring in 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 sector, too, 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 homebuilders 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 last 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 may 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.
Source: Business Standard
Mumbai based pharmaceutical giant Cipla came under the scanner of the income tax authorities on Thursday for alleged tax evasion. Read more
Tata Steel, amid a crisis in Britain's steel sector, has warned its suppliers that if they do not slash prices Read more
Tata Steel has joined hands with a leading UAE-based petrochemical company, aimed at broadening its market base for energy sector Read more
MUMBAI: Tata Steel is looking to raise at least $1.5 billion to refinance its bloated debt and reduce interest cost, Read more
