Industrials may be first to pick up if ROE downturn reverses: Jefferies

Financials last in line

The industrials sector, which includes companies like Larsen and Toubro, will be amongst the first to turn around if the trend on Return on Equity (RoE) reverses.

The RoE for the sector, a key measure of profitability, has fallen from a peak of 19.7% in the financial year ending in March 2007 (FY07) to 7.9% in FY13. Meanwhile, the ROE for the Nifty companies outside the financials segment, has fallen from 26% in FY05 to 14.8% in FY13, noted the Jefferies India report dated October 17.

“Industrials are the early cyclicals and…they will also likely be the first to recover when the cycle turns,” said the India Equity Strategy report authored by equity analyst Piyush Nahar.

The discretionary sector, which includes companies in the auto segment, may be the next to recover, according to the report.

The financial sector would be amongst the last to recover, according to Nahar.

“Financials are the late cyclicals and their RoE are not yet reflecting the extent of slowdown visible in the corporate sector. Even in the case of a cyclical recovery, we believe that the downtrend for financial RoEs could continue for a few more years,” added the report.

It said that valuations are implying a reversal of the RoE downtrend for the majority of sectors with consensus estimates suggesting a recovery in RoE to 15.6% for Nifty companies excluding financial sector ones.