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Looking ahead: Will critical sectors top or flop in 2019?

Author: Kumar Shankar Roy/Wednesday, January 2, 2019/Categories: Exclusive

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Looking ahead: Will critical sectors top or flop in 2019?

2019 is already upon us. While brokers and market experts usually share Sensex/Nifty year-end targets, such numbers do not really add any value to an equity investor besides giving an idea about expectations direction wise. The market is composed of different sectors and each sector houses many companies. So, here is sector wise outlook of some of the most critical sectors like banking, FMCG, pharma, IT, infrastructure, capital goods etc. Sectoral outlooks provide you with deeper insight and that can help you take informed decisions about what to do with your equity investments in 2019.

Cementing ties

The consensus view about the cement sector, which is linked to India’s growth and construction related fortunes, is that the sector is staring into an up-cycle. No longer is the cement industry building more capacity than demand. While the demand is good, proper utilisation of capacity is expected to generate optimum operating leverage. Expect large cement players to not be afraid of taking price hikes. Recent changes in axle load norms can provide additional loading capacity and lower freight cost. Lower petcoke rates can act as further margin tailwind. Stick to large and established players. 

Capital goods revving up

The interest rate sensitive capital goods sector does well if rates are low. To that extent, actual interest cuts by RBI can result in financial leverage gains for the sector in 2019. Strong growth in public capex and recovery industrial segments is likely to help generate double-digit topline growth. Large engineering companies with giant order books will not suffer any working capital hiccups, providing an extra shield of protection.

Bank on us

Banking and finance sectors account for 35-40 per cent of index weights. Hence, they determine how the overall market moves. 2019 is expected to bring good tidings for the space. Twin problems of credit cycle and a stressed loan pool are being addressed. Large corporate-based banks have been worst hit in terms of NPA and bad loan provisioning. So, naturally they will key beneficiaries of resolutions and the upturn. However, do watch out for management changes and ensuing strategic course corrections. These can act as overhang for select stocks and may test your patience. Post the NBFC liquidity crisis scare, sticking to banks with strong liability franchises is smart. Large NBFCs with strong group parentage and retail-heavy book are great picks. 

Motown in slowdown

Globally, the auto sector is experiencing a transitory phase amid growth slowdown concerns. The domestic automobile industry is likely to see gains capped in both commercial and passenger vehicle space. However, the two wheeler space is expected to continue showing resilience. The ecosystem to witness double-digit growth is most pronounced in case of two wheelers. With rural and farm income being in spotlight, two wheelers remain a great idea for 2019. While auto ancillaries with large export exposure should elicit caution mixed with optimism, tyre sector appears in good stead from easing cost perspective due to drop in prices of crude derivatives.

Tech that

Rupee depreciation landed gains in IT and technology sector in 2018. Predicting how forex markets will move in 2019 is impossible. However, global growth worries necessitate that IT/technology outlook be laced with caution. Macroeconomic uncertainties in the UK over Brexit, heightened volatility in European finance and possible slowdown in the US economy are negative triggers. The sector is still to find permanent solutions for age-old issues like shrinking margins, and traditional business stress. Surprises can be in store for those players with higher margin digital business with operational flexibilities. While midcap IT appears potentially great, large tech majors with cash generating structures can result in buybacks, dividends and a refuge in case markets turn topsy turvy after 2019 Lok Sabha elections.

Consumer carnival

The Indian growth story is about consumption. On one side there is consumer discretionary companies and on the other hand are FMCG or Fast Moving Consumer Goods. Poll-related activity in rural areas will help drive volume growth in consumer discretionary segment. Stick to companies with strong earnings growth, lighter balance sheet and higher return ratios. The sector is expensive. Those firms with established brands will have an edge. In the FMCG space, strong growth is anticipated in 2019 on the back of higher election spends and government’s thrust on farm income. Prefer rural focussed FMCG plays. Companies with the ability to do price hikes and strong brand networks will be able to push through ‘premiumisation’ efforts. While solid FMCG companies remain expensive, they have managed to deliver great returns even at elevated valuations. So, investors must remember this nugget while investing in FMCG stocks in 2019.  

Infrastructure impression

The sector has of late seen strong tendering activity. But do remember, this may peter out soon as elections are preceded by a complete stop of orders and tender related work. Of course, new government formation will once again restart the engine. EPC firms with strong orderbooks will weather any interim slowing down much better. Balance sheet strength is important in navigating infrastructure stocks. In the 2004-08 cycle infrastructure was well placed but faltered due to balance sheet and execution related problems. While the sector is past those legacy issues, avoid players with mixed track record. If the interest rates turn benign, a rally in infra stocks could be much more pronounced on the back of higher earnings estimates.

Metals and mining monitor

For the global metal sector, the outcome of China-US trade negotiations is the most important monitorable. Locally, Indian steel demand is anticipated to be firm and the long term focus in infrastructure is expected to support steel demand. Some experts in market prefer ferrous players vis-a-vis non-ferrous. This preference is due to the better strength witnessed in global steel prices versus non-ferrous players, levy on anti-dumping duty to protect domestic steel firms and weak Chinese steel shipments. Stick to players with higher concentration of flat steel/value added product exposure in their portfolio. Better to avoid midcaps.

Healthcare punch

In 2019, expect pharma companies to streamline product suite and implement cost rationalisation initiatives in a bid to boost profitability and return ratios. The US specific headwinds are far from over. Specialty products will get more focus while research budgets in general could be capped. Cheaper material sourcing and lower crude prices could help margins expand. Healthcare companies like hospitals and diagnostics are better and safer plays than purely global pharma firms. The Indian healthcare story is in much better shape than the trends outside. Health insurance is also an interesting side theme to explore in 2019, given that it is insulated from the vagaries of regulatory risks that pharma companies face day in and day out.

The author is a financial journalist with 14 years of experience   


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