Auto
The auto sector has been one of the worst-affected due to the rise in metal prices, higher interest rates and dip in demand. The drop in commodity prices will help companies improve their margins and prompt price cuts ahead of the festival season.
While commercial vehicle and high-end car sales would continue to be muted due to high interest rates, demand for lower-end cars, two wheeler sales and tractors are likely to be driven by high rural demand. Two wheeler makers Hero Honda, Bajaj Auto, Maruti Suzuki and M&M could give good returns over the next six months.
Banking
Lower inflation numbers for the last three weeks had breathed new lease of life to the banking sector. RBI’s monetary policy, the initiatives of the government and good monsoons will ease inflation in the medium term.
Experts say that interest rates have peaked and may cool off by the year end. While the falling 10-year bond yield, from 9.5 per cent to present levels of 8.3 per cent, is a positive precursor, a small hike (25 basis points) by the RBI is though not ruled out (and perhaps, is already discounted by the market).
In the meantime, the banks have leeway to tighten their strings and focus on pertinent issues like cost cutting, asset quality and protecting margins. Banks such as SBI, ICICI, Union Bank and Axis Bank are likely to benefit.
Engineering and Capital Goods
The softening input prices should ease out some pressure on the margins as many of the companies have recently hiked product prices. However, a depreciating rupee is making imports more costly. The issues pertaining to interest rates, inflation and the slowdown in the industrial and infrastructure space are still in play. The rising interest rates and the input prices have compelled companies to go slow on the new investments.
Also, funding for new and the existing projects through equity (attracting investors) and debt have become more difficult. Though the strong order book will see them through the next two years and should have a positive impact on revenue growth, this is already reflected in the valuations.
What is needed is the pick up in the investments and industrial capex, which may happen only after companies get an assurance in the form of a pick up in demand. Analysts prefer stocks like Cummins India, Voltas and Crompton Greaves, as they are the most attractive in terms of valuations.
Metals - Ferrous/Non-ferrous
While there is some relief as prices of inputs (such as iron ore and coal) have come down, it is not enough as coal prices are still high. And Indian companies have to depend heavily on imported coal.
Additionally, the depreciation in the rupee has made the imports more costly. Also, whatever gain the companies will have on account of the fall in the iron ore prices has been passed on to the customers by way of cut in steel prices on account of weak global steel prices.
A few of these large players such as Sail and Tata Steel, which have their own iron ore mines and being integrated plays, should earn relatively better margins as compared to non-integrated players.
The Indian non-ferrous companies will be negatively hit on account of 20-30 per cent correction in the global commodity prices. Aluminum, copper and zinc manufacturers might get affected and will show lower margins and profits.
Most of these companies have a higher base as the commodities prices were better then. However, the falling rupee could be a positive for the Indian non-ferrous companies. Despite this and the benefit of new capacities, the net impact could still be negative as the global prices have corrected significantly.
Analysts expect margin pressure on companies like Hindustan Zinc, Hindalco and Nalco.
Pharmaceuticals
The fall in the rupee will help pharmaceuticals companies (Ranbaxy, Glenmark, Lupin), which derive a large chunk of their revenues from international markets.
Part of the higher import cost due to a rise in raw material costs from China and the costly dollar will be neutralised by exports. Companies with higher FCCBs (Ranbaxy, Sun Pharma, Wockhardt) on their books will have to account for it and there will be a translational loss.
Software
The weaker rupee will be a relief for tech firms that have been grappling with a slowdown in the US economy, which is one of their biggest markets. A one per cent depreciation of rupee against the dollar pushes up operating margins by 35-40 bps for IT firms, which however, this time around might get diluted due to growth concerns.
The earnings should nevertheless get a boost of 3-5 per cent in FY09 on account of a weaker rupee. The upsides due to the weakening rupee may be capped, if the RBI intervenes by relaxing ECB norms. Firms that have lower forex hedges (Infosys and Satyam) are expected to benefit the most.
Textiles
While the sharp depreciation of rupee against the greenback is a positive for the textile industry, it continues to feel the heat from higher raw material costs, slowdown in US (demand impact) and increased competition from countries like Vietnam and Bangladesh.
"Rise in cotton prices (30-35 per cent in last one year) would eat up much of the gains made by the industry from the reverse currency movements," points out Nirav Shah of Pinc Research.
Companies like Gokaldas and Welspun India would benefit the most, as more than 60 per cent of their business is in the form of exports; some gains could get offset due to weak demand.
Shah adds that with the softening of crude oil prices, polyester manufacturers like Indo Rama Synthetics and RSWM Ltd should be able to improve their margins.