Underperforming Sectors in the Indian Stock Markets

underperforming sectorsIn this post I look at the most underperforming sectors in the Indian stock markets over the last 3-6 years. The intention naturally was to find out if there is anything that merits buying in any of these beaten down pockets.

 [I]    Oil & Gas – Exploration | Refining| Oil Marketing Companies (OMCs)

In the oil and gas space, there has been significant run up in stock prices of Oil Marketing Companies (OMCs) over the last few months. This is largely on account of cheap crude oil prices that prevailed during the earlier half of this year (i.e. 2016). With crude oil prices reviving from the lows of below US $ 30 per barel to over US $ 50 it may not be the best time to invest or to stay invested in OMCs. In a declining crude price environment, OMCs make higher profits as low crude oil prices result in (i) reduction in purchase price (of crude oil) (ii) improves refining margins; and (iii) improves marketing margins.  

Also see: How do Oil Marketing Companies (OMCs) make Money

Companies  Price as on 8 June 2015  Price as on 8 June 2016  % change
 Oil Exploration 
 ONGC 306.35 215.70 (30%)
 Cairn India 180.65 143.70 (20%)
 Oil India 466.35 351.05 (25%)
 Reliance  885.25 954.15 8%
 MRPL 65.35 67.40 3%
 Chennai Petroleum 106.65 196.70 84%
Oil Marketing Companies
 IOC 350.75 414.00 18%
 BPCL 843.10 980.05 16%
 HPCL 670.50 904.75 35%

At the same time, oil exploration companies have underperformed with crude oil prices at multi year lows. I expect crude oil prices to revive towards the later part of this year and believe that the valuation differential in the oil and gas space merits investing in exploration stocks (and selling OMC stocks).

Top pick in this space remains – ONGC which I had recommended at 190 and again at 207 (see full recommendation report here) and continue to recommend at 215. With crude prices expected to rise, margins for refiners like Reliance industries will remain under pressure.

[II]    Metals & Mining – Steel

To begin with, future assessment of this sector should look at demand – supply equation for metals. I had written an elaborate post on metal stocks sometime back where I covered these factors and also how demand slowdown in China is good news for the Indian economy.

Read here: Future of Metal Stocks in India

I do not want to repeat most of what I have already covered in that post but the central focus was to suggest that:

If you were a pure value guy, who wanted to buy something today and hold on to it for many years, then there are stocks in this sector which are available at ridiculously low prices. It’s not like commodity prices are never going to revive. Once they do, some of these stocks could start to trade much higher.

Metal Companies  Price as on 8 June 2015  Price as on 8 June 2016  % change
 Coal India 399.70 306.80 (23%)
 Hindustan Zinc 169.00 170.20 1%
 NMDC 121.60 90.40 (26%)
 JSW Steel 867.60 1,395.30 61%
 Tata Steel 302.85 341.50 13%
 Vedanta 177.05 111.80 (37%)
 Hindalco 118.05 109.20 -(%)
 SAIL 62.25 42.00 (33%)
 Jindal Steel 103.95 64.50 (38%)

Top pick in this space remains – Steel Authority of India (SAIL), currently trading at Rs. 41/ share, which is close to its 12 year low price. SAIL registered a net loss for the first time in a decade for FY 2016. It is true that net loss for the company has deepened over the last few quarters but in my analysis this does not merit the stock to trade at its current price. SAIL’s reserves stand at Rs 35, 859.61 Cr and its long term borrowings stood at Rs. 16,310.65 Cr as on 31 March 2016.

[III]    Infrastructure – Roads and Highways | Power | Capital Goods

We have covered this sector many times in past. For detailed analysis of companies belonging to this sector, and some of the best and worst players in this space, refer to the 2 articles linked below:

Read here: Indian Infrastructure Sector Analysis

 Best Infrastructure Stocks in India

Companies  Price as on 8 June 2015  Price as on 8 June 2016  % change
 Larsen &Toubro 1,677.55 1,510.65 (10%)
 Adani Ports 302.45 203.70 (33%)
 BHEL 242.80 121.40 (50%)
 ABB 1,267.60 1,230.85 (3%)
 Reliance Power 45.40 52.25 15%
 SJVN 23.85 27.60 16%
 IRB Infra 232.40 215.70 (7%)
 VA Tech Wabag 726.05 616.05 (15%)
 Ashoka Buildcon 167.9 131.85 (21%)

In past I have said many times – we cannot have an isolated growth for India. Particularly with infrastructure not participating, it would be unlikely that India will maintain a high GDP growth. What you should decide is whether you believe in India’s growth or not. If you do, then there is absolutely no reason to not have some quality infrastructure stocks in your portfolio on a permanent basis. Contrary to what many would believe, this is a sector which is easiest to pick stocks from because over 80-90% of companies here are either bankrupt or nearly bankrupt. You don’t really have to struggle much to shortlist from what is still healthy and trading.

Top pick in this space remains – Larsen & Toubro (L&T). L&T’s weightage in the CNX infrastructure Index is over 30% making it the bellwether stock for the entire infrastructure pack. It is the most diversified of all infrastructure companies in India.

For detailed analysis and my views on investment potential of L&T Stock, see this post here: Larsen & Toubro Stock Analysis


Standard Disclaimer: Please do your own research before buying / selling any stocks discussed here or otherwise. Keep in mind that this is not an exhaustive list of stocks in the 3 underperforming sectors analysed above. Further, my own views may have changed since the time of this research.