MUMBAI: Automobiles may be the only silver lining among Indian industries to invest in now due to unabated demand, while infrastructure and banking face macroeconomic headwinds that could squeeze earnings leading to underperformance.
Telecom and consumer goods makers may also benefit from the rising middle income population, but the competitive pressures could reduce their profit margins which may not help these stocks performance either, said a fund manager.
"Demand from tier II and tier III cities will drive the growth in the auto sector," said Abhijit Gulanikar , chief investment officer, SBI Life, which manages Rs 25,000 crore in equity investments for policyholders . "Affordability is increasing in tier II and tier III," he said referring to state capitals and district headquarters. "The guidance given by most of the auto companies is good."
Sale of cars and motorcycles are setting new records every month as the burgeoning middle class people aided with rising incomes and liberal loans from banks, are splurging. Companies such as Maruti Suzuki , Hero Honda and Ford are expanding capacities and introducing new models to draw customers. Government spending on employment and infrastructure programmes are also helping the rural economy that has set off a growth spiral in smaller towns. The Bombay Stock Exchange's Auto Index has gained 24% in the past year, compared with the benchmark Sensex's 10.7% rise. SBI Life holds Tata Motors and Maruti Suzuki.
A McKinsey and National Council of Applied Economic Research forecasts that middle class, defined as the ones with a monthly income between Rs 7,500 and Rs 85,000, may grow from 27% in 2005, to 76% by 2025. Domestic sale of cars and trucks have averaged 13% between 2003 and 2009. It may grow at a compounded growth of 18% this decade , with domestic sales rising seven times its 2009 level, forecasts ICICI Bank. "India is beginning to see the first signs of a long-term consumption boom as a result of rising disposable incomes, higher life expectancy, rapid urbanisation and changing lifestyle," says ICICI Bank in a recent research note.
But it may not be a smooth ride when inflation is disturbing every calculation and that interest rates are rising with the RBI poised to raise for the ninth time in this rate hike cycle on May 3 when he presents the monetary policy for this fiscal. This could be a drag on banks whose costs of funds are rising and that defaults may increase if the overall demand is hurt by high prices. "Interest rates are likely to catch up with banks very fast. During this year, tightening will be at its peak and they are likely to see liabilities on pension. The bond market has already discounted 50 basis points hike," said Gulanikar who owns ICICI Bank, HDFC Bank and mortgage lender HDFC.
"We have seen spectacular story in the past two ears. Other than infrastructure , not many companies are borrowing from India since it is cheaper overseas.'' A basis point is 0.01 percentage point. The infrastructure theme may play out for a long time, but there are many hiccups facing the industry , he said. "If you say the infra story is very good, you should go for infra-related investments. That will mean power and construction companies ," said Gulanikar who owns Reliance Industries and Tata Steel . "But each sec-tor is facing some problem or the other. In power , there is an issue of coal supply.
In capital goods, there's an environmental clearance. On the construction side, everyone got stuck in real estate." Consumer goods and telecom, that were investors' favourite once, are also loosing sheen as competition erodes profitability. "They are catching the market share and losing out on margin," said Gulanikar referring to consumer goods makers. He owns cigarette maker ITC which dominates the market. So is the case with telecom companies which are also stuck in the licensing scandal. "Pricing is not an issue in telecom, but we have to see if the average revenue per user increases after the 3G rollout." It has a stake in Bharti Airtel .
Telecom and consumer goods makers may also benefit from the rising middle income population, but the competitive pressures could reduce their profit margins which may not help these stocks performance either, said a fund manager.
"Demand from tier II and tier III cities will drive the growth in the auto sector," said Abhijit Gulanikar , chief investment officer, SBI Life, which manages Rs 25,000 crore in equity investments for policyholders . "Affordability is increasing in tier II and tier III," he said referring to state capitals and district headquarters. "The guidance given by most of the auto companies is good."
Sale of cars and motorcycles are setting new records every month as the burgeoning middle class people aided with rising incomes and liberal loans from banks, are splurging. Companies such as Maruti Suzuki , Hero Honda and Ford are expanding capacities and introducing new models to draw customers. Government spending on employment and infrastructure programmes are also helping the rural economy that has set off a growth spiral in smaller towns. The Bombay Stock Exchange's Auto Index has gained 24% in the past year, compared with the benchmark Sensex's 10.7% rise. SBI Life holds Tata Motors and Maruti Suzuki.
A McKinsey and National Council of Applied Economic Research forecasts that middle class, defined as the ones with a monthly income between Rs 7,500 and Rs 85,000, may grow from 27% in 2005, to 76% by 2025. Domestic sale of cars and trucks have averaged 13% between 2003 and 2009. It may grow at a compounded growth of 18% this decade , with domestic sales rising seven times its 2009 level, forecasts ICICI Bank. "India is beginning to see the first signs of a long-term consumption boom as a result of rising disposable incomes, higher life expectancy, rapid urbanisation and changing lifestyle," says ICICI Bank in a recent research note.
But it may not be a smooth ride when inflation is disturbing every calculation and that interest rates are rising with the RBI poised to raise for the ninth time in this rate hike cycle on May 3 when he presents the monetary policy for this fiscal. This could be a drag on banks whose costs of funds are rising and that defaults may increase if the overall demand is hurt by high prices. "Interest rates are likely to catch up with banks very fast. During this year, tightening will be at its peak and they are likely to see liabilities on pension. The bond market has already discounted 50 basis points hike," said Gulanikar who owns ICICI Bank, HDFC Bank and mortgage lender HDFC.
"We have seen spectacular story in the past two ears. Other than infrastructure , not many companies are borrowing from India since it is cheaper overseas.'' A basis point is 0.01 percentage point. The infrastructure theme may play out for a long time, but there are many hiccups facing the industry , he said. "If you say the infra story is very good, you should go for infra-related investments. That will mean power and construction companies ," said Gulanikar who owns Reliance Industries and Tata Steel . "But each sec-tor is facing some problem or the other. In power , there is an issue of coal supply.
In capital goods, there's an environmental clearance. On the construction side, everyone got stuck in real estate." Consumer goods and telecom, that were investors' favourite once, are also loosing sheen as competition erodes profitability. "They are catching the market share and losing out on margin," said Gulanikar referring to consumer goods makers. He owns cigarette maker ITC which dominates the market. So is the case with telecom companies which are also stuck in the licensing scandal. "Pricing is not an issue in telecom, but we have to see if the average revenue per user increases after the 3G rollout." It has a stake in Bharti Airtel .
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