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Money Dec 31, 2012

Equities: Sectors likely to hog the limelight in 2013

By Rajesh Pandathil

The year 2012 was magical for the stock markets. The year started off on a low key, with pessimism ruling the roost.

But things took a turn for the better, and the market is poised to end the year on a strong note, with all-round optimism and feel-good boosting sentiment.

The U-turn boosted investor wealth by 27 percent to around Rs 67.7 lakh crore with the stock indices gaining nearly 25 percent.

There are two reasons for the rally: one is the foreign investors' interest in the Indian markets and the second is the bullishness induced by the reform measures taken by the United Progressive Alliance for September.

Foreign investors have invested $23 billion in Indian equities in 2012, the second highest for a year. Reuters

Foreign investors have invested $23 billion in Indian equities in 2012, the second highest for a year. Apart from the cheap money, the UPA's reform binge also drove FIIs to Indian equities.

Despite criticism that the reform steps steered by Finance Minister P Chidambaram are merely treating the symptoms and not the disease (read here, here and here), the best thing that happened for the equity market in 2012 was the change of guard at the finance ministry which saw his return to the North Block.

The upbeat sentiment in the market was palpable as the stock indices surged on hopes the new finance minister may finally end the indecision and inaction that marked the tenure of his predecessor Pranab Mukherjee.

Right from the first media interaction of Chidambaram, the benchmark indices took wing.

However, it is evident that the reforms and assurances by the finance minister have not yet managed to instil confidence among retail investors.

Local investors have cashed out of equities, forcing a Rs 55,000 crore sell-off by domestic institutional investors, according to a Mint report.

For the stock market, despite the uncertainty over the US fiscal cliff 2013 is likely to start off with a bang as the RBI has indicated it will ease interest rates in January-March.

"In the beginning of 2012 the valuations were much cheaper than they are at this point in time. So clearly from a valuation perspective the market is not that cheap," Jeff Choudhry of F&C Investments told CNBC-TV18.

"Having said that, economic situation is probably slightly better. Inflation is more under control, and economic growth is slightly stronger. So I wouldn't be surprised to see another 15-20 percent return from India in 2013," Choudhry said.

Kotak Institutional Equities has educed its overweight positions in some of the interest-rate sensitive stocks because of the sharp run-up in their prices in the recent past, the brokerage said in a note on 21 December.

It expects inflation and interest rates to moderate in 2013, but rich valuations are unlikely to allow a further re-rating of its preferred stocks, the note said.

It is also sceptical about the continuance of the reforms momentum.

"With the reforms process largely stagnating, the Indianstock market will primarily swing on global liquidity," it said.

Tirthankar Patnaik of Religare Capital Markets, who sees the Sensex at 22,000 by September by 2013 based on valuation multiple of 14x, echoes the sentiment.

"A lot depends upon the reform program. The big up move for 2013 will come on the drivers that have taken the market since the second half of the year," he told CNBC-TV18.

"Hope-trade on back of reforms which was announced by the government since June has been driving the market. We expect the same to happen in 2013. How things will pan out depend on the reform programme," he said.

Here are a few sectors that are likely to hog the limelight in 2013.

Banking: The sector is seen in focus as the amendment to the banking laws will kick-off the much-needed reforms in the sector. The RBI's expected rate cut is also likely to boost these shares. Ajay Bodke of Prabhudas Lilladher told CNBC-TV18 that the brokerage has relatively turned positive on some of the large-cap banking names. "We are looking at upgrading Punjab National Bank as a buy. We continue to accumulate the other biggies in PSU banking space like SBI, Union Bank of India, Bank of Baroda and Bank of India," he said.

Another key development expected in the sector is the issuance of new bank licences. Stocks of a few non-banking finance companies like L&T Finance Holdings, Shriram Transport Finance and M&M Financial Services have risen as investors perceive them to be strong contenders for the licence.

Auto: A key trigger for the sector will the interest rate cut by the RBI. Though 2012 was not a good year for the auto sector, there are silver linings for the next year. As an interest-rate sensitive sector, automobile companies are likely to witness a boost in their sales once the Reserve Bank of India cuts interest rates. A general improvement in economic activity is also likely to provide an impetus to the stocks.

According to a report in the Business Standard, analysts are betting on Maruti Suzuki Ltd. This is because of its "lower foreign exchange risk, rising exports, an improving product mix, price rises and a fall in discounts", the report said. The stock has given a 68 percent return over the past year, the report said, pegging the target for the stock at Rs 1,700.

In the two-wheeler segment, Bajaj Auto's strong exports market helps it overcome the depressed sales in India. However, the stock is not a preferred one for most analysts as it has risen 33 percent in 2012, the BS report said.

For Tata Motors, 2013 may not be a great year as boost from JLR is already factored in. The report quotes Nomura analyst as saying that profitability of the company's standalone business will be under pressure as medium and heavy commercial vehicle sales volume declines. The growth of its passenger vehicles business is also likely to be crippled due to deeper discounts and lower volumes, the report said.

FMCG: Fast moving consumer goods, considered defensive, is another sector that would benefit from the interest rate cuts. "I am bullish on the FMCG sector. The likely decline in inflation and the expected rate cut will boost economic activity, prompting households to spend more on consumer goods," said Alex Mathews, head of research, Geojit BNP Paribas Financial Services.

He sees good prospects for the companies engaged in agri-businesses such as ITC, Hindustan Unilever and Nestle India.

Capital goods: For capital goods, the year may not be a good year. According to a report in the Business Standard, stocks such as Bharat Heavy Electricals Ltd (BHEL), BGR Energy and Thermax, may look attractive but analyst see more downside in these stocks.

The government's reforms push has not yet resulted in any fundamental change for the sector. No new power projects have been announced, the report said.

"With continuing concern on no new power capacity being announced by the private sector, NTPC's capex plan over the medium term also may not be sufficient to boost ordering-many orders for capacity to be set up till FY20 have already been placed," the report quoted Goldman Sachs as saying.

by Rajesh Pandathil

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