Polls bring policy-related stocks back in focus

These stocks have rallied up to 25% on the BSE in the past month, against the Sensex's 1% gain

The coming general elections have brought policy-related stocks back into the limelight, with stocks in the fertiliser, oil and gas, sugar, infrastructure and capital goods segments rallying up to 25 per cent on the BSE in the past month, compared with BSE Sensex’s rise of about one per cent.

“Historically, the Indian market has rallied sharply after any favourable election outcome, that is, a stable government, with a single party holding a commanding position in Parliament,” says Jitendra Sriram, equity strategist and head of research for India at HSBC Securities & Capital Markets.

Andrew Tilton, chief Asia-Pacific economist at Goldman Sachs, says: “The parliamentary elections in early 2014 are a major area of uncertainty, with a potentially large impact on policy reforms and investor/corporate sentiment in either a positive or negative direction.”

Building gains
Infrastructure and capital goods stocks saw the sharpest rise among policy-related counters. The S&P BSE capital goods index has outperformed the market, gaining about six per cent in the past month, against a 1.3 per cent fall in the S&P BSE Sensex. In the past three months, it surged about 29 per cent, compared with a 10 per cent jump in the benchmark index.

The rally in select counters has also been aided by an impressive show in the September quarter results and the fact that earlier, these stocks had taken a beating, analysts say.

“In our view, if the Bharatiya Janata Party-led National Democratic Alliance comes to the power, it would be positive for infrastructure-led sectors, while a Congress-led United Progressive Alliance government would be positive for consumption-led sectors,” says HSBC’s Sriram.

Daljeet S Kohli, head of research at IndiaNivesh Securities, says, “We continue to maintain that companies with exposure to consumer vertical (such as Voltas, Greaves Cotton and Crompton Greaves) would be less impacted by the down cycle. Companies with strong liquidity (Kirloskar Oil, Ingrsoll Rand and Voltas) are well positioned to face the challenging macro environment. We sense unless any major policy announcement is made, a revival in capital goods sector is still a few quarters away.”

In the realty space, Parikshit Kandpal, an analyst with Karvy Research, picks Sobha Developers and Puravankara; and Oberoi Realty and Kolte Patil in the western market. Among companies in the North, he awaits more clarity on DLF’s deleveraging plans. He expects the Aman deal to be closed by the third quarter of FY14, which would lead to a strong re-rating for DLF.

Fuelling hope
Shares of oil and gas companies have been in the limelight on hopes of diesel deregulation. The recent deal between Iran and western powers is likely to keep crude oil prices under check. This, in turn, will bring down overall production costs for Indian refiners.

With the deregulation of diesel prices and a gas price rise likely, analysts at Motilal Oswal pick ONGC and Oil India in the upstream space and Bharat Petroleum in the oil marketing companies pack. They maintain a neutral stance on Gail India, owing to gas availability headwinds. “However, Petronet LNG is available at an attractive valuation and we maintain a buy rating on Cairn India for its attractive valuation. We remain neutral on RIL,” stated a Motilal Oswal report dated November 19.

Sweet gains
Of late, sugar stocks have seen price action on reports the Centre is working on a financial relief package for the industry.

“Millers that do not have presence in Uttar Pradesh such as AP Sugar, EID Parry, Shree Renuka Sugars, Dharani Sugars and Bannari Amman Sugars will benefit more from this development. Those who have adequate stocks in their warehouses, despite presence in Uttar Pradesh, will benefit from sugar scarcity, in case prices firm up. Of the lot, I like EID Parry, AP Sugar and Shree Renuka Sugars. One can play these stocks from a short-term perspective, as the upside may not last too long,” says A K Prabhakar, an independent market analyst.

Amar Ambani, head of research at IIFL, however, suggests investors avoid these counters. “Sugar stocks would continue to react to the ongoing news surrounding the shutdown by UP-based mills due to high sugarcane prices; we advocate a cautious stance and recommend avoiding sugar stocks at this juncture.”