The equity markets witnessed a sharp correction over the first week of May 2024 following a surge in frontline indices to all-time highs. Heightened tensions in the Middle East impacted global markets, and had a rippling effect. With the impact of the Lok Sabha elections largely being priced-in by the markets, much of the focus has shifted towards sectors that are likely to witness growth going forward. With expectations around strong reforms and the country’s growth focus, are PSU sectors like Infrastructure, Power, Railways and renewable energy likely to remain major beneficiaries?
Infrastructure: Expectations around the infrastructure sector being able to maintain a robust CAGR are leading to investments in the sector. It’s notable that almost 70% of the Government’s Capex spending has been earmarked towards the development of this sector. With Infrastructural development turning into the backbone of solid growth and development, this is a sector that is likely to witness significant traction going forward.
Power & Energy: This sector goes hand in hand with Infrastructural development. As infrastructural growth become essential for the development of the country, having reliable transmission and distribution systems becomes essential. With a lot of focus being places on renewable energy and carbon free emissions, this sector has been receiving a lot of interest and is likely to witness massive growth to support development.
FMCG: The trend towards ‘premiumisation’ in the Indian markets is largely owing to higher disposable incomes and the youth demographic. FMCG as a sector has been amongst the beneficiaries of this trend and it currently contributes a significant portion for the country’s GDP.
Travel and Hospitality: Higher disposable incomes, rising aspirations and the rising ‘concept’ of outdoor company meetings/conferences and exhibitions have led to a significant growth in the sector. Hotels have been vying to expand their business by buying/leasing properties across places that are likely to turn into future tourism hotspots. The Indian Hospitality sector’s potential growth of 14% (CAGR) by 2029 can be largely attributed to the average Indian consumer’s now demanding premium 4/5-star facilities. The stocks in this sector offer a good buying opportunity based on the valuation and risk levels.
Pharma: Increasing costs of R&D have been tainting the profitability levels in the sector. The inflation adjusted cost of developing new drugs doubles every nine years, requiring a significant capital outlay. In addition, domestic pharma companies encounter additional issues like pricing pressure and heterogenous regulatory compliance requirements across international markets. Although models like Contract development and manufacturing set ups come as a welcome relief for pharma companies, we think that this is a sector that we’d invest with caution.
Technology: The country’s most globalised business and the largest export earner has been witnessing sluggish growth over the past year. Rising global interest rates and the ongoing geopolitical issues have led to the industry lagging behind. However, with the prices of a lot of stocks in the sector bottoming out, this could prove a good buying opportunity for investors who will be able to stomach the volatility.
Communications: Capital intensive, marred by regulations and the significantly high pricing pressure. These are a few of the factors that define the communications space. Despite these issues, the industry is trading at a PE ratio of 50.8x which is higher than its 3-year average PE of -89.8x. revenues have grown over 20%, thus making the sector a profitable one. On an overall basis, the Communications sector contributes about 6.5% to India’s GDP making it one of the most important sectors for the country’s growth. Earnings are forecast to grow by 39% annually. Having said that this is a sector that we’d invest with some caution.
Auto and Auto Ancillaries: Favourable macroeconomic factors like India’s growing economy, investments in infrastructure and robust replacement demand have been buoying the sector forward. Moreover, the increased focus on alternative fuel options like EV and hydrogen fuels have also been drivers of the sector. The industry grew by 8% in FY2024, a trend that was likely driven by replacement demand. Decarbonization, digitalization and connectivity are reshaping the automotive industry and transforming the automotive world.
Banks & NBFC’s: NBFC’s have witnessed a lot of volatility in the past, largely owing to the levels of unsecured holdings amidst regulatory tightening. Banks on the other hand have been recognised as the being linked to the country’s economic growth. Major reforms in the banking sector like the cleaning up of the bank balance sheets, asset quality review and the implementation of the IBC code have all led to a cleaner industry set up within the banking and NBFC space.
With the economy remaining poised for growth, we think that the India growth story will weave into multiple sectors that are likely to give investors a significant upside. Having said that we think that it’s important to evaluate the inherent risks within each sector and adapt a bottom-up approach while selecting stocks. In addition to looking at sector level returns, it’s also important to evaluate and invest a portion of an investor’s holdings in debt funds. With the interest rates holding steady for now, we think that Arbitrage funds as well a short-term funds are categories that investors can look at from a short term perspective.
