As the Sensex flirts with all-time highs, it is time again to examine prospects of the underperformers — blue chips that are nowhere near their all-time highs and have lagged the index move by a very wide margin. Sometimes, around new peaks, investors look back and see whether there is some merit in playing for a bounce in the ones that have not participated in the run-up.
In the last couple of days we have seen some interest in two underperforming sectors, cement and automobiles. For cement, the future is a bit uncertain but the present seems robust. Prices are still steady and cement companies should report solid numbers in the next couple of quarters. While stock prices will inevitably discount the fresh supply coming up in 2008, in the near term, at least, a trading bounce could be justified. For automobiles though, any buy call has to be valuation driven. Given fears of a demand slowdown led by interest rate hikes, valuations have been compressed almost to historic lows. However, unlike cement, the near term news flow is likely to be negative. The next few quarters are likely to be shaky. The cycle may turn after a few quarters and longer-term investors who can wait it out may find these valuations attractive. It will need to be a contrarian call and may require some patience.
The other big underperformers have been information technology, fast-moving consumer goods and downstream oil. Despite recent underperformance the market is worried about the first quarter picture for the infotech majors and, worse, what they may say about the future. Till that event is out of the way, infotech may continue to underperform. Given that valuations here, relative to the index, have also been compressed, the second half of the year could see a recovery. Unless the rupee has another sharp spike. Consumer goods may continue to languish in a trading range as there are no major visible growth triggers and oil marketing companies, despite seemingly attractive valuations, remain pinned down by strong crude oil prices and resultant marketing losses. Infotech, automobiles, cement and consumer goods account for 34 per cent of the Sensex. One can understand why a move to new highs has been so laboured, given that a third of the index has been a dead weight.
(The writer is Executive Editor, CNBC-TV 18)