Turnaround in cyclicals to continue-'Experts'.
Turnaround in cyclicals scrips set to continue; stocks still cheap considering expected rise in Q1 earnings
(Monday, June 28, 1999-Business Standard)
Pradipta Bagchi in Mumbai
Is there life left in the cyclical rally? Is the value hunting over? The recent spate of profit booking in bluechip cyclical stocks like Larsen & Toubro(http://www.larsentoubro.com/), Reliance Industries (http://www.ril.com/), Grasim adityabirla.com, Hindalco (http://www.adityabirla.com/companies/hindalco.html) and Indian Rayon (http://www.adityabirla.com/companies/indrayon.html), which had risen by between 70 and 100 per cent in the rally since April, has left investors wondering whether the fancy for such stocks has peaked.
Market experts, however, believe there is a long way to go and the cyclicals have merely paused for a breather to consolidate.
One research study by a large brokerage house found that the rally in cyclicals is in no way over. For the study, the brokerage looked at the market by splitting the listed firms into two segments; one that constitutes stocks belonging to the information technology, consumer goods and pharmaceutical stocks (CIP) and another which has everything else like cyclicals, banks, utilities and telecom (non-CIP).
For this, the study tracked the historical price earnings ratios of the two sectors with their present valuations. While the CIP index currently trades at 39 times of its one-year forward earnings, the non-CIP stocks trade at only seven times of the forward earnings despite the steep rise in prices in the last 10 weeks.
Analysts compare these numbers to the five-year PE average of these sectors and point out that while the CIP PE is 32, the non-CIP PE is 11. This shows that even on the basis of the experience of the past five years, the cyclical stocks remain clearly undervalued.
Another reason for the rally to continue is that so far the cyclical stocks have risen because of value hunting by investors, but they are still cheap considering the increase in earnings these companies are poised to show in the first quarter this year.
"The next phase of the rally in cyclicals will be dictated by earnings growth the companies post. While these stocks have risen from the rock-bottom valuations, they will undervalued when they post higher-than-expected numbers," says a strategist at a large brokerage house.
Analysts estimate that earnings of companies engaged in cyclicals businesses like petrochemicals, cement, paper and aluminium will post higher top and bottom line figure in July. "If that happens, these stocks will seem undervalued again," he adds.
The Bombay Stock Exchange sensitive index has been driven by the CIP firms which comprise 55 per cent of the weightage over the past two years. But it could be the non-CIP companies, comprising 45 per cent of the sensex, that might take the index beyond its historical highs in the next two years. |
