Sectors To Watch Out For

There could be very many methods of choosing right stocks for long-term investments. One of the most correct ways of choosing a right stock is to first identify a sector that is showing strength. Once an investor identifies right sectors that are showing strength the probability of making good returns increases considerably. Sectoral analysis is key to investing success. We hereby present analysis on two such sectors that are expected to grow impressively. Investors can look at investing opportunities in these two sectors for coming year.

Sector Analysis:

AUTOMOBILE 

Commanding a growth rate of 11 per cent during the Jan-May 2017 period when the economy was still reeling from the impact of demonetisation, the Indian automobile industry boasts of being the third largest automobile industry in the world. The sector has witnessed a slew of major launches in 2017 and the markets are awaiting more launches by automobile giants such as Ashok Leyland, Ford Motors, Mahindra & Mahindra and Renault.

The sector has been privy to significant reforms throughout the year, including the unprecedented order by the Supreme Court banning the sale of BS-III vehicles from April 1 onwards and the GST roll-out. However, the sector has fared well and is reaping strong financial earnings.

While most of the economy is grappling with the short term slowdown brought about by the GST roll-out, the auto sector has by far largely benefited from the GST roll-out. The lowered cost of production post the implementation of GST has spurred the production capacity of the auto sector, also appealing to the international auto manufacturers as an outsourcing hub.

The government of India is exclusively focusing on the electric car segment in a bid to meet its emission reduction targets. Under the National Electric Mobility Mission Plan, the government aims to sell only electric cars by 2030 and has thus incentivised the electric car segment with a subsidised tax rate under the GST regime. The growing inclination of auto giants towards electric cars, backed by the government's commitment to the cause, is soon likely to result in a slow yet gradual shift in the sector from fuel-driven vehicles to electric vehicles.

In the month of September, the sales of domestic passenger vehicles rose by 11.32 per cent, car sales increased by 6.86 per cent, motorcycles sales jumped by 6.98 per cent and commercial vehicles grew by 25.27 per cent, according to a data released by SIAM.

On the stock exchange, on a year-to-date basis, S&P BSE Auto index has recorded a return of 21.36 per cent, surpassing the 19.48 per cent return from S&P BSE Sensex. While auto major Maruti Suzuki posted a 48.57 per cent YTD return, Bharat Seats with 156.46 per cent YTD return, became the top most auto stock in terms of return generated for the period. The other auto stocks that surged the most on the bourses during the corresponding period were Talbros Engineering (135.1 per cent), Minda Industries (124.75 per cent), Sharda Motor Industries (101.58 per cent) and PPAP Automotive (94.83 per cent).

The automobile sector is likely to drive the growth rate of the economy in the future. The sector is looking forward to a strong growth momentum on the back of festive season in the short term and a rising income and growing middle class and youth population in the long term perspective, making auto stocks the buzzing investment choice.

Sector Analysis:

METAL 

The financial year 2016 was a forgettable year for the metal industry with most companies reporting huge losses. However, had you taken a contrarian bet on metal stocks last Diwali, you would be grinning from ear to ear since the metal sector stocks turned out to be the second fastest growing stocks over the last one year.

The slowdown in the metals sector was majorly due to drop in metal prices in London Metal Exchange (LME), lower demand in the domestic market reduced market share due to Chinese imports. However, the recovery began in the second half of FY17. In Q3FY17, the top nine major metal companies made a cumulative profit of around Rs 5,900 crore as against a loss of Rs 1,000 crore during the same period a year ago. In the non-ferrous space, a strong recovery in the LME prices has led to an improved earnings outlook. Apart from the recovery in prices, falling input prices have also helped the profitability of companies, since the raw material expense makes up to 45-60 per cent of the overall costs for companies in the metals space. Falling coking coal prices augured well for domestic steel companies that are dependent on imported coking coal.

There has been an increased availability of coking coal as myriad mines have been reopened in Australia, Canada, the US and Mozambique, which in turn, has led to the fall in prices in China. Considering no major demand push or supply constraint, prices of coking coal are expected to stay at the current levels. Also, the anti-dumping on steel products, which has been levied for a period of five years, will protect the domestic steel industry from imports coming from China and other countries.

Since Diwali last year, the stock of Gravita India Ltd, a leading player in the manufacture and export of lead, has gone up by more than 328 per cent, while the stock of Shivalik Bimetal Controls Ltd, a company specializing in the joining of materials, has gained by 263 per cent. Vedanta Ltd, a leading company in zinc, lead, silver, aluminium, copper and iron ore, registered a 44.78 per cent rise. Bhagyanagar India Ltd, a company dealing in copper products, gave 44.92 per cent returns to investors. Among wire and cable companies, Ram Ratna Wires Ltd and Bharat Wire Ropes Ltd gave returns of 146 and 68 per cent, respectively.

According to the World Steel Association (WSA), the steel demand in India will be the highest for both 2017 and 2018 among major steel consuming nations. In 2017 and 2018, India's steel demand is expected to grow by 6.1 per cent and 7.1 per cent, respectively. Also, the top nine listed metal companies are expected to record an average annual earnings growth of around 40 per cent during 2017-19.