Indian Economy Sectoral Outlook

For long-term investors, the importance of understanding the dynamics of a sector cannot be understated. Understanding dynamics play a very critical part in stock-selection. Each sector goes through different market cycles. Let us understand the current and forthcoming outlook of the different sectors of Indian equity markets.

Automobile sector:

The Indian Automobile sector has seen a significant demand improvement with most categories witnessing encouraging traction. The long-term outlook for the auto industry remains positive as demand drivers are intact and many companies may offer decent upside from current levels. In Q4FY22, auto companies broadly reported better-than-expected results, exhibiting outperformance on the margin front, aided by improving product mix, higher realizations, cost control measures, and positive operating leverage led by improving volumes. New product launches are expected to help drive excitement among buyers with the SUV segment retaining the consumer pulling power.

Demand momentum in the Commercial Vehicles segment is likely to sustain and the CV cycle is expected to maintain its momentum driven by the pickup in the economic activities and the government’s focus on infrastructure.

Furthermore, the introduction of a duty on steel export may lead to gross margin improvement for Automakers are expected to translate into earnings upgrade as most companies are likely to retain the benefit.

Banking and Financial Services sector:

FY23 appears promising for the BFSI sector as most of the Banks/NBFCs remain well-placed to capitalize on the growth opportunities. Outlook on the asset quality front remains encouraging with expectations of slippages moderating and recoveries remaining healthy aiding improvement in asset quality. The growth momentum is expected to remain healthy but delays in the investment cycle may impact the overall growth in the near term.

Cement:

Higher cost of power/fuel remains the key concern for cement companies as they are not able to pass on the entire cost inflation to the final consumer. H1FY23 is likely to witness the impact of cost inflation on margins. However, a hike in cement prices in Apr’22 and May’22 would help mitigate the higher cost to an extent. On average, the price hike has been in the range of Rs 25-30/bag. The long-term outlook remains positive as demand drivers are intact. Cement prices have improved and are expected to remain elevated on the back of higher costs seeing a correction of Rs 5-10.

FMCG:

In the FMCG space, demand is expected to remain weak for discretionary items (Personal Care, Packaged Food, and Health Care) in the near term. Volume growth is likely to be muted on account of subdued rural demand and inflationary pressure. On the positive side, normal monsoon guidance, increase in wages, higher crop realization, and output will be key attributes in rural demand revival which is expected to revive only in H2FY23. While the sector has strong earnings visibility and best-in-class return ratios, the Hyperinflation across raw material prices crude/palm oil/ packaging will weigh on margins in the near term and limit the upside potential.

IT:

Indian IT companies reported a robust performance in FY22, registering strong broad-based growth, backed by healthy business demand and favorable macros. Though the demand is on the rise, supply-side challenges remain a key concern that may restrict revenue growth momentum moving forward.

Moreover, higher employee costs may negatively impact overall operating margins. Furthermore, rising inflation and higher interest rates in North America (a major contributor to the revenue) would lead to unfavorable macroeconomic conditions, contracting IT spending across verticals. 

Metals and Mining:

Due to the introduction of a steel export duty of 15% by the GOI, Steel prices are expected to decline in the coming quarters. In the long term, steel companies will manage their utilization levels to stop the reduction in domestic steel prices if the export volumes get diverted to the domestic market needs to be monitored. The capacity addition plans of steel companies with large Capex plans will be the key challenge for the steel industry. If the government does not roll back the steel export duty in the foreseeable future then the return on the Capex plans will come under pressure unless the domestic demand increases to absorb the incremental volumes.

Oil and Gas:

Oil Marketing Companies (OMCs) were benefited from the inventory gain and better Gross Refinery Margins in Q4FY22. Furthermore, OMCs, too, delivered better performance overall. However, the recent move by the Government of India (GoI) to pass on excise duty cuts to consumers has quashed all hopes of OMCs' recovery in recovering marketing margins. Given the GoI’s top priority clearly being inflation control, it seems unlikely that auto-fuel retail prices will be raised anytime soon. 

Pharma:

The Pharma sector reported mixed-bag results in Q4FY22 with the majority of the growth contributed by the US and India region while the API segment reported de-growth. In the US market, price erosion is still persisting in the range of high single-digit while the launch of new value-added products has driven the growth. The domestic market has shown healthy growth after the end of the pandemic. 

Telecom:

Telecom has become the most critical sector during the current challenging times to keep businesses up and running. The sector was seeing an improved pricing environment even before the COVID-19 outbreak. The industry is highly consolidated with two strong and one weak player in the wireless space.