One market, many moods: Why some sectors are depressed, and some buoyant

Realty

The realty sector had a weak second quarter in FY23 as deliveries and new project launches were impacted by the erratic and prolonged monsoons. The pandemic highlighted the need for larger houses as work from home became the order of the day. “With benign home loan rates and excess inventory from earlier years that depressed prices, developers did brisk sales, improving their balance sheets, paring borrowings, and acquiring new properties for development”, said Gopal Kavalireddi, Head of Research at FYERS, an online trading platform.

But the mood changed in October 2021 due to higher apartment prices, rising commodity prices, supply chain disruptions, and rising inflation.

Vaibhav Porwal, Co-Founder of the portfolio management firm dezerv, said, “There are two main factors impacting the real estate sector.” First, interest rates have run up significantly over the past 12 months, because of which the cost of capital has gone up by 2-3 percent, which impacts the margins of developers.

Additionally, rising interest rates have made home loans more expensive, especially hitting demand for affordable housing that caters to lower and middle-income families. “These two factors have affected the price of real estate stocks,” Porwal explained.

Nonetheless, experts continue to hold a positive view about the sector. Per latest reports, demand for housing, especially in the premium segment, continues to be strong, with most developers launching new projects with higher margins.

“Demand is expected to remain high in the top seven cities of India, as large gains from financial assets over the past two years gets redirected to physical assets,” added Kavalireddi.

Also, according to Divam Sharma, Founder of portfolio management service Green Portfolio, “the K shaped recovery of the economy, lower liquidity, and job cuts can impact consumption going forward.’’

Technology

The Indian IT sector, which had a good run during the pandemic, has seen a reversal in its fortunes and de-grown ~16 percent over the past year. This is despite Dollar revenues growing ~11 percent year-on-year (YoY) along with a ~7 percent on-year growth in net profit in the September quarter. The perception about the sector has become negative in anticipation of global headwinds emerging from slowdown in global economy.

Deal wins witnessed an upward trajectory and the management continued to exude confidence that the deal momentum will largely remain strong. In certain pockets, however, clients are becoming cautious about discretionary spends.

Anil Rego, Founder and Fund Manager at financial advisory firm Right Horizons, sees the headwinds continuing for IT because, “post the pandemic, IT, cyclical and capital-intensive businesses like power, metals, energy, and infra outperformed. However, as uncertainty in the global environment took hold, we have seen recessionary fears among major economies, which has led to the IT sector underperforming.’’ He expects IT to remain volatile for the next two quarters as US and Europe, its key markets, are expected to remain under pressure.

Consumer durables

The consumer durables sector did not see the kind of boost in sales it was expecting during the festive and wedding seasons. As a result, returns from the sector declined 12.3 percent.

Home appliances and other consumer durables got a leg up as during Covid people were locked in. The upswing in revenues and profitability supported the rise in stock prices.

However, “as the pent-up demand subsided and commodity prices began to rise, consumer companies incurred higher raw material costs. This eroded their margins, causing investors to ditch the sector”, said Kavalireddi.

Buoyant sectors

Power

The Power sector, along with capital goods and auto, have been the top three performers over the past 13 months. With the opening up of the economy post-pandemic, and the increase in economic activity across sectors, the demand for power surged to an all-time high resulting in improved plant load factor, better realisation, and efficiencies of scale. Improvement in performance coupled along with attractive valuations caused investors to embrace the sector, which saw strong returns.

Infra and capital goods

The prospects of the infrastructure and capital goods sectors got a boost with the union government increasing the capex outlay in the FY23 budget. The Prime Minister's Gati Shakti Program, the National Infrastructure Pipeline (NIP), and the National Monetisation Pipeline (NMP) has helped improve the order books of capital goods companies.

A Credit Suisse report says that, “Data points from capital goods imports and FDI suggest that the momentum is modestly positive and has room for strengthening further.”

Credit Suisse prefers stocks like L&T, Siemens, Cummins, Thermax, and ABB, and Ultratech.

As per Sharekhan, defence stocks like HAL and BEL should be accumulated on dips as they are the biggest beneficiaries of defence-related capex and indigenisation. From a long-term perspective, it suggests we buy stocks like L&T, Cummins, Honeywell Automation, and KSB Ltd.

Auto

The auto sector is growing on the back of pent-up demand in the passenger vehicle (PV) segment. We also see demand picking up in the commercial vehicle (CV) and tractor segments. The slew of new model launches has largely received a good response from customers, and the same is reflected in the long waiting periods for deliveries. Only the two-wheeler segment is still struggling due to lower demand from rural areas.

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