Rate-sensitives gain on growth optimism

While the Nifty Auto index ended the day at record high levels, Nifty Bank and Nifty Realty indices saw profit booking at higher levels

Interest rate-sensitive stocks are on a roll. While the Nifty Bank index reached its 52-week high on the National Stock Exchange (NSE) on Monday at 19,158, the Nifty Auto index hit a record high of 9,331. Last week, the Nifty Realty index had touched a 52-week high of 211 during intra-day deals.

While the Nifty Auto index ended Monday at record high levels, Nifty Bank and Nifty Realty indices saw profit booking at higher levels and closed 0.2 and 1.2 per cent lower, respectively. By comparison, the Nifty 50 index ended 0.4 per cent weaker at 8,509.

Since the presentation of the Budget, when the overall market sentiment turned positive, the Nifty Realty index has zoomed 55 per cent, while Nifty Bank and Nifty Auto indices have surged 36 and 30 per cent, respectively, against 22 per cent gain in the Nifty 50 index.

Among stocks, Bajaj Auto, Hero MotoCorp, Tata Motors, and Mahindra & Mahindra from automobiles, and HDFC Bank, Lakshmi Vilas Bank, Bajaj Finance, Housing Development Finance Corporation, Gruh Finance, and LIC Housing Finance from financials, were quoting at their respective 52-week highs.

While the positive cues have already propelled these stocks to their respective highs, analysts say the rally has more steam left and investors could stock up from a medium- to long-term perspective. However, they do not rule out profit booking in the near term given the sharp rise since February levels.

According to analysts, the current uptrend in auto stocks is being fuelled by expectations of an economic recovery in the second half of the financial year (October-March), driven by a normal monsoon, implementation of the seventh pay commission suggestions, and expectations of further reforms in the upcoming monsoon session of Parliament. “Implementation of the pay commission suggestions and recovery in rural India should ensure steady growth for the passenger vehicles segment over the next 12-18 months,” says Tirthankar Patnaik, India strategist at Japan-based Mizuho Bank. Outlook for commercial vehicles, he says, is also positive, with continued pick-up in investment activity.

Karvy Stock Broking expects volume recovery by mid-FY17 across segments amid favourable monsoon benefiting rural India as well as the overall economy. It expects the commercial vehicle cycle uptrend to continue for the next two-three quarters, and sees a sharp rebound in tractor sales. That apart, most analysts expect companies in the auto space to report a healthy performance for the quarter ended June.

"We expect auto companies under our coverage universe (excluding Tata Motors) to report a nine per cent year-on-year (y-o-y) growth in net profit, led by a 14 per cent y-o-y growth in revenues and marginal decline in earnings before interest, taxes, depreciation and amortisation margin due to increase in commodity prices,” says a result preview note from Kotak Institutional Equities.

Analysts at CLSA recommend increasing exposure to the real estate, banking and financial services sectors. “Monetary-easing expectations are rising in India. GREED & fear would advise investors to increase exposure to Indian interest rate-sensitive stocks, most particularly in the housing finance and residential property sectors, where the passage of a law in March bringing long overdue regulation to that sector has created the backdrop for a new property cycle,” wrote Christopher Wood, managing director and equity strategist at CLSA, in his weekly note to investors.

"Investments in Indiabulls Housing Finance and DLF will be introduced in the Asia ex-Japan long-only portfolio with three per cent each, while the existing investment in Prestige Estates will be increased by one percentage point. These investments will be paid for by removing the existing investments in Reliance Industries Ltd and Baidu, a Chinese web services company," he added.