The Reserve Bank of India (RBI) move to raise key rates to contain inflation seems to have changed the short-term odds against the scrip of sectors sensitive to interest rate, such as banks, real estate, infrastructure, consumer durables, auto and cement.
However, these sectors could be the best bet as long-term investment, say analysts.
At a time when banks are finding it difficult to raise funds for lending, they would now have to raise lending rates, thanks to the RBI move. This in turn would force many individuals to shelve purchase plans with respect to housing, auto and consumer durables, affecting the valuations of stocks in these sectors. This could result in negative stock valuations for banks as well: when credit demand slackens, their margins would come under pressure.
“Attractiveness depends on investment horizon. If one is looking at 6 months to one-year horizon, it is better keep away from them. And if one can keep invested for two-three years then these can give the best appreciation in value,” said Hitesh Agrawal, research head of Angel Broking. It is generally anticipated that the interest rate cycle would turn to the other side in a couple of years.
Housing, auto and consumer durables sectors would also suffer from the high cost of their debt, like any other company. However, the higher cost of servicing debt is likely to hit capital-intensive sectors the worst.
“Higher cost and scarcity of funds (due to higher rates) will be negative for capital intensive industries like power, engineering, capital goods and infrastructure,” said Siddhartha Sanyal, chief economist, Edelweiss Securities.
“The best sectors during high interest rate regime include information technology (IT), fast moving consumer goods (FMCG), and pharma sectors. Gas distribution and some media companies also fall in this category as demand for their products and services may not take a hit,” Agrawal said. These sectors are not so capital-intensive.
Companies like SAIL and Tata Steel, which have better backward linkages (in the form of iron ore mines) would also be protected from the higher costs of buying ore.
“Companies with better backward linkage and in possession of scarce natural resources may benefit as they can evade the evils of spikes in specific input costs,” Sanyal explained.