Here are our views on select sectors shared in some discussions we regularly have as SEBI Registered Investment Advisors.
Healthcare Stocks & Advisory View
The healthcare industry has undergone a rollercoaster ride since the onset of COVID-19 in March 2020. Domestic pharma sales, which used to clock an average sales growth of 10% per annum until FY2019-20, fell at the beginning of FY2021 due to the COVID-induced disruption. However, as the pandemic progressed, increased COVID testing, treatment, and preventive medications caused a major increase in sales towards the latter part of the fiscal year.
The second full year after the Covid outbreak, FY2021-22, saw a gradual reduction in growth rates, with a trend of reversion-to-mean being observed. April month’s YoY sales were -5%, which could be attributed to some complacency creeping in among the general population and hence reduced demand in the wake of Covid recoveries.
While Covid-induced healthcare spending has abated, the long-term demand for healthcare is likely to remain upward, with people preferring branded hospital chains. In fact, many large hospital players are expanding capacity now that things are settling down in the post-covid era. For care providers, this could see an increase in margins once the new capacities get commissioned.
An interesting aside is that general insurers are seeing health insurance premiums increase upwards to almost reach the levels of their motor premiums. This is a sign of the growing awareness and importance of health insurance among the general population. With the rising cost of healthcare, people are increasingly realizing the need for adequate health insurance coverage.
To sum up, the healthcare industry has seen a volatile growth pattern since the onset of Covid-19. While the short-term demand for healthcare has been affected by the pandemic, the long-term demand is likely to remain upwards. Care providers are also looking to expand capacity in the post-covid era, which could see an increase in margins. The growing awareness and importance of health insurance among the general population is also a positive sign for the healthcare industry.
Iron & Steel Stocks & Advisory View
The steel industry has been impacted by various geopolitical tensions around the world. The ongoing Ukraine-Russia war and the Covid-19 pandemic in China have had a significant impact on steel prices, production, and consumption. In the western markets, steel prices rose steeply during Q4 of FY 2021-2022 due to tight supply and recovering demand.
China is the world’s largest player in steel, and prices there were relatively more stable during this time as COVID-19 restrictions reduced demand. Despite this, China’s steel exports continued to be in the 4 to 5 million ton range, indicating a steady level of production. However, volatility in coking coal prices was seen, with rapid rises and declines.
In India, steel consumption improved by ~4% between Q3 of FY22 and Q4 of FY22 due to the ongoing economic recovery. The infrastructure and construction goods sector saw steady growth, but this trend was sharper in the passenger and commercial vehicles industry. The automotive sector is an important market for steel and is recovering post-Covid in India.
In Europe, the automotive sector is also recovering post-Covid but is facing shortages related to semiconductors and the impact of the Russia-Ukraine war. The shortages of semiconductors are adding to the production challenges in the industry and therefore reducing the rate of recovery. The ongoing war is also causing disruptions in the steel supply chain, which is putting pressure on prices and availability.
The steel industry is a vital part of the global economy, and the recent geopolitical tensions are having a significant impact on production and consumption. Companies in the industry will need to closely monitor global events and adapt their strategies accordingly to mitigate the impact of these disruptions. The Indian industry seems to be doing well and the government’s pro-growth policies are helping the sector to perform well. But the European industry is still recovering from the pandemic and facing new challenges. The industry will need to adapt to these new realities and focus on finding new and innovative ways to produce, market and sell steel in this complex environment.
Building Materials Sector & Advisory View
A sector that consumes the above Iron & Steel industry outputs is the building materials sector which includes stocks of companies involved in the production and distribution of cement, paints, pipes, steel, and ceramics. This is currently facing a number of headwinds. Rising interest rates, inflationary pressures, and price hikes are all factors that could potentially negatively impact the sector.
Despite these challenges, our outlook for the building material sector is relatively positive. This is due in part to the infrastructure push that is currently happening across the country. Additionally, housing demand remains buoyant in many cities, with the sector showing strong growth in recent quarters.
In terms of the impact of rising prices, it is important to note that many building materials are considered “committed expenses” – that is, they are items that are only purchased when required. As such, price hikes may not have a significant impact on demand for these materials. However, builders and housing finance companies may face margin pressure due to inflationary pressures.
It is also worth considering that some of the demand for building materials may be considered discretionary – for example, people may choose to postpone repainting their homes if prices are high, but may still purchase new furniture for an upcoming wedding. Similarly, higher interest rates may lead some individuals to postpone the decision to purchase a second home, but commercial construction may be less affected by these factors.
Overall, the real estate and construction sectors have shown a strong recovery in recent quarters, and it is likely that this demand will continue in the near-to-medium term. While global factors such as rising interest rates and inflationary pressures may have some impact on the sector, it is unlikely that these will significantly dampen demand for building materials. Investors may also see the real estate sector as a safe haven, which could further support demand for building materials.
Information Technology Stocks & Advisory View
The IT sector has seen a significant increase in demand over the past year, driven by the global shift towards digitization following disruptions caused by the Covid-19 pandemic. As a result, the IT index has risen by 40% over the past year, driven by an increase in earnings. However, the industry has also faced several challenges, including a significant escalation in costs related to talent retention and acquisition. Talent wars have ensued, leading to a dip in margins. Inflationary pressures have only added to these costs.
In response to these challenges, many companies have recruited large numbers of freshers in an effort to reduce costs in the long term. However, these employees only add to costs before they become productive and billable, resulting in a dip in operating margins by nearly 200 basis points. Despite these challenges, the industry is expected to continue seeing strong demand and deliver good growth.
The rupee-dollar exchange rate may also be favorable over the next year, which would aid operating margins. Additionally, the ongoing war in Ukraine and Eastern Europe is causing large global companies to reevaluate their offshoring strategies and outsource more work to India to mitigate geopolitical risks. Overall, the IT sector is facing some challenges, but with the right strategies and adaptability to changing circumstances, the industry is likely to continue growing in the coming year.
Realty Stocks & Advisory View
We spoke of the building materials sector earlier. Every person dreams of owning a house. Investment in real estate, particularly residential property, generates passive income. There is a belief that land prices do not go down and, hence, Real estate is a safe investment. However, real estate is capital-intensive and largely financed by Debt. Rising interest rates and a relative decline in one’s financial position, either in terms of income, or liquidity, result in the postponement of investment in real estate.
Today, the Realty sector is not doing well as liquidity is getting squeezed and interest rates are rising. NRIs looking to invest in India will wait for the USD/ INR rate to stabilize, as a lower exchange rate reduces their cost in USD terms. While demand for new homes gets muted on account of these factors, builders have to grapple with higher interest expenses on existing loans, which might impact their bottomline. There is also a tendency to sell existing inventory at a discount to manage cash flows. Since we see interest rates moving up across the globe in the near to short term, the Realty sector will also under-perform.
However, the fastest growing economy will soon see renewed interest in the Real estate sector. The war is stoking inflation, which in turn is pushing up interest rates, which also impacts the USD/INR exchange rates. The trigger for an uptick, in reality, will be when the war stops. Over the long term, demand for real estate will continue to be buoyant, as we see more people relocate for employment, driven by an upsurge in economic activity. Investors must choose real estate companies with low debt to tide over the current turbulence.
Conclusion
To conclude, various sectors have their own patterns and drivers. As SEBI-registered investment advisors, we always recommend that one take a bottom-up approach to stock selection and focus on companies rather than sectors. A well-diversified portfolio will moderate exposure to sectors once the first principle is met.
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