FY13: Year In Perspective

The year gone by had begun on a negative note, was lined political uncertainty, the European debt crisis, a highly volatile concluding quarter and just a few gains, thanks to some reforms, only to end on a negative note, says Shrikant Akolkar

So investors, did you make any returns from equities in FY13? The answer could be affirmative or negative, but overall it can be said that FY13 has proved to be quite a volatile year, with the leading index, i.e. Sensex, yielding merely eight per cent returns. In contrast, CY2012 was a better year, wherein the BSE Sensex gave returns to the tune of 26 per cent. However, considering the negative 10 per cent returns from the Sensex in FY12, FY2013 did manage to create some wealth for investors. In fact, if one looks at the issues that the economy and the equity markets battled in the fiscal, the eight per cent returns look quite comforting.

At the beginning of FY13, the conditions in the equity market did not look very good. Industrial production had started to decline, inflation remained consistently above the RBI’s comfort zone, the Indian government was showing was unable to bring reforms, and the Indian sovereign rating was on the verge of a downgrade. To add to this were the Euro zone troubles that continued to emerge every now and then, and the US being stripped off its AAA grade by S&P. Under these circumstances, the year looked to be another one when investors would lose money in the markets. Apart from that, with the interest rates at a peak, the bonds and deposits were starting to look better, which does not augur well for equities as investors start to gravitate towards those options.

Such pessimism however remained only in the first half of the fiscal. What brought cheer in the second half was the appointment of P Chidambaram as the Finance Minister. The reformist FM infused new confidence in the capital markets, going ahead with reforms which changed the sentiment on the street. The reforms which led the markets’ upmove included FDI in retail, doing away with the diesel subsidy and debt restructuring. In addition, the third round of quantitative easing (QE3) that was announced in the US in September 2012 resulted in India witnessing more foreign funds, which also took the markets higher. The earning seasons of June 2012 and September 2012 also saw a few sectors notching up a good performance. Better than expected results for Infosys in the December 2012 quarter were also a positive on the IT sector in particular.

However, things have changed in the March 2013 quarter as the Euro zone devil has come to haunt the market again in the form of Cyprus. Though the Cypriot crisis has calmed temporarily, other countries in Europe may be sitting on a time bomb. Back home too, the political stability has been disturbed slightly, which took the markets to a lower range. With a budget which lacked pro-growth policies, a GDP growth of 4.5 per cent, lower industrial output, higher inflation and a lower than expected rate cut from the RBI, the markets have moved towards a red zone in the March quarter.

Top Stocks

As regards the Sensex performers for FY13, the top three scrips also represent the top three performing sectors. Sun Pharmaceuticals was the top gainer, generating 42.50 per cent returns, followed by the FMCG major ITC with 36.58 per cent and the largest software exporter TCS with 32 per cent.

Jindal Steel & Power (down 35.78 per cent) and Tata Steel (down 33.81 per cent) emerged as the strongest losers, with a consistent decline in realisations, plummeting demand and issues on the mining front. BHEL (down 32 per cent) fell victim to the prevailing concerns in the power sector, as order inflows dried up and also witnessed a sharp decline in operating margins.

Sector Watch

The standalone sectoral performance has been varying. The FMCG sector emerged as the top wealth creator in the fiscal. As a few stocks were already up significantly in FY12, investors were sceptical of the FMCG valuations being able to sustain themselves and going any higher. The index, however, has proved that Indian consumption has remained strong, providing volume growth for the companies.

Healthcare, which is another defensive sector, also showed a robust performance, with the BSE Healthcare index yielding returns of 21 per cent in this period. The sector roped in higher revenues from the US, where a few big-ticket products went off patent. The companies were also benefited by the rupee depreciation.

The IT index also managed to outperform the Sensex in FY13 by clocking 13 per cent returns. Initially, the gains were due to the rupee depreciation that gave exporters an advantage. The outlook of the industry took a downward trend after that in response to the global macroeconomic conditions. It was only towards the end of the fiscal year 2013 that the outlook improved significantly, as the global demand scenario improved and companies made secular changes in their business models.

Banking, which was a hot favourite in the first nine months, gave up its winning streak towards the end of the year on account of rising non-performing assets (NPAs) and shrinking net interest margins. However, despite these hiccups, the index managed to garner 11 per cent returns.

Consumer Durables has also recorded 11 per cent returns. The sector has seen better rural demand, which augured well for companies in the sector. Higher disposable incomes in the rural and semi-urban areas led to an increased demand for the products.

The Oil & Gas index closed just about in the positives, with merely three per cent returns. Heavyweight RIL lost investors’ favour as it consistently reported lower output from the KG-D6 basin. Recently, the government has taken a few policy initiatives such as diesel price deregulation, capping subsidised cylinders, allowing exploration in the existing oil blocks, etc., that would help companies in the sector.

The Realty index has not seen any change in value. Factors like higher interest rates in the year and a higher debt burden had a negative bearing on the sector. The decline in the repo rate at the start of the fiscal was not enough to lift the demand. The RBI has cut the rates again, but the inflationary scenario may limit further rate cuts and therefore the scenario may not show a huge improvement.

The Automobile sector looked like one of the favourites last year. However, the situation has taken a u-turn in FY13, which has mainly resulted out of weak macroeconomic factors. This sales mayhem has also seeped into the two-wheeler industry. However, with a couple of rounds of interest rate reduction, the industry is expected to show signs of recovery starting Q2FY14.

The Capital Goods sector has clocked in negative returns over the weak outlook on the sector. The reduction in the capex cycles of companies, negative investment environment in the country, delays in land acquisition and high interest rates have all taken a toll on this sector.

The PSU index in the fiscal has also underperformed. The government, in its efforts to reduce the fiscal deficit, had issued offers for sale (OFS) of some companies at discount. While the retail participation is unknown, the insurance giant LIC acted as a saviour for all OFS. The prices of these PSUs have come down despite the huge discount given on each OFS owing to investors turning negative on the PSUs.

The Power sector has been an underperformer for many years in row. In FY13, the index tanked 21 per cent giving a massive blow to investors in the sector. The health of the sector remains weak even now as certain government decisions are yet to materialise. The fuel shortage along with financial issues in the sector will make sure that the sector will remain least preferred in FY14 once again.

The Metals index is the worst performing index with the slowdown in the global economy, particularly China. A ban on iron ore exports, coal scam, etc. have further affected the financial performance of metal companies.

IPO Rush

Although a few big IPOs like Speciality Restaurants, Bharti Infratel and CARE Ratings hit the markets in FY13, the primary market largely remained muted. A few big ticket IPOs are expected in FY14, but the market conditions are still in doldrums thus limiting the number of IPOs in the year.

Looking Ahead

While this is the story of FY13, investors would be interested in knowing what lies ahead. Our cover story for this issue deals in detail with what to expect from the markets going ahead. Read on…