The Sensex and the Nifty have remained flat on a month on month basis and rallied 37.24% and 38.78% respectively in the last one year. Expectations of a stable Government led the rally before the election results and the actual verdict further fuelled the markets to all time record high levels in the month of September 2014. Even though the valuations look marginally expensive for the markets, expectations of revival in the economic activity is likely to extend the rally in the near future. Festival season witnesses increase in consumption of the individual, which plays a part in the economic growth of the country.
Festival season has already begun and consumption is expected to increase in the month of October 2014. The industries that are most likely to gain from this scenario would be mostly relevant to consumption of goods and stocks within this space would be expected to perform better than the market. The question now remains as what to expect from stocks in these sectors that have already rallied to record high levels in the last month, but now wait for new set of numbers due to festival season consumption and give higher returns than the benchmark indices.
Fast Moving Consumer Goods sector, Consumer Durables and the Automobile industry are expected to witness strong growth in revenues due to the festival season in India. Companies have already started to launch offers, discounts and schemes to promote sales growth and make the most of it from the likely increase in the demand from consumers.
Automobile Industry stocks are already rallying on the recovery in the sales of companies and this is expected to continue in the festival season with higher growth expected on a year on year basis. Last year during the festival season markets had become volatile because of anxiousness about the new government that would come into power in the month of May 2014. Now as the newly elected Government with a strong mandate has come into power, economic activity is expected to see further revival in growth. The Automobile industry was given a stimulus in the form of reduction in the excise duty of vehicles by the previous Government and the new Government has extended the same till the month of December 2014. With this background the Automobile industry is expected to show sustained recovery in growth with new launches to attract the consumer and drive higher sales growth.
The S&P BSE Auto index is trading at a Price to Earnings multiple of 15 and as such trades at a discount to the BSE Sensex that has a Price to Earnings multiple of 18.3 in the current scenario. The total market capitalisation of the Auto and the Auto Ancillaries stands at Rs.6171 billion. Individual stocks in the Auto and Auto Ancillary space have further potential to deliver returns as new launches and higher sales growth would propel them to the next level. Stocks in this space could be likely candidates for getting rerated at par with their peers as well as the higher rated stocks to propel to new levels.
Rubber prices have cooled off from high levels seen in the earlier years and the tyre manufacturing industry stands to gain from the reduction in raw material costs with further increase in margins and profitability coupled with likely rise in sales revenues due to the festival season. Commercial Vehicle segment of the Automobile industry is yet to recover completely (Read our Monthly Automobile Sales Report) and stocks in this area can witness an uptick if credit becomes cheaper for customers to borrow for purchasing new fleet of vehicles.
The S&P BSE FMCG index is trading at a Price to Earnings multiple of 40 and trades at a premium to the BSE Sensex that has a Price to Earnings multiple of 18.3 in the current scenario. The total market capitalisation of the FMCG index stands at Rs.7000 billion. Even though valuations in the FMCG space look expensive in comparison to the benchmark index, growth outlook looks positive and encouraging in the near future. Some of the big names in the FMCG space would gain as a result of this scenario.
The S&P BSE Consumer Durables index is trading at a Price to Earnings multiple of 192 and trades at a premium to the BSE Sensex that has a Price to Earnings multiple of 18.3 in the current scenario. The total market capitalisation of the Consumer Durables index stands at Rs.728 billion. Consumer Durables index seems to have already discounted higher sales due to seasonal growth as second quarter numbers would start to reflect in the quarterly results. One must be extremely careful and choosy in selecting stocks in this space as a correction across the broader market would erase significant gains for the stocks in this sector.
The S&P BSE Bankex index is trading at a Price to Book Value of 2.1 and trades at a discount to the BSE Sensex that has a Price to Book Value of 2.94 in the current scenario. The total market capitalisation of the Bankex index stands at Rs.8943 billion. With the credit growth trending at multiple year lows Banks are likely to find the next leg of growth as economic activity revives and it becomes feasible for companies to undertake new investments.
There are some sectors like Metals and Infrastructure that are least likely to rally as commodities are trading at low prices right now and are not likely to rally soon due to lower growth in China. Infrastructure stocks would further rally on the policies and decisions implemented by the new Government at the Centre from now onwards.
The S&P BSE Metals index is trading at a Price to Earnings multiple of 13.6 and trades at a significant discount to the BSE Sensex that has a Price to Earnings multiple of 18.3 in the current scenario. The total market capitalisation of the Metals index stands at Rs.5867 billion.
The S&P BSE India Infrastructure index is trading at a Price to Earnings multiple of 17.32 and trades at par to the BSE Sensex that has a Price to Earnings multiple of 18.3 in the current scenario. The total market capitalisation of the Infrastructure Index stands at Rs.8418 billion.
Debt ridden companies should be avoided in the current market scenario as any correction in the market drastically erodes value of these companies.
Table 1: Monthly Market Movement