Sustained capital inflows from foreign institutional investors (FIIs) betting on the Indian elections has seen about 176 stocks from the BSE-500 index rally more than 50% in past seven-and-a-half months when the benchmark indices - the S&P BSE Sensex and the CNX Nifty - touched their respective 52-week low in intra-day trades on August 28, 2013.
Of these 176 stocks, 52 scrips have rallied over 100% including Adani Enterprises, JSW Steel, Housing Development and Infrastructure Limited (HDIL), Crompton Greaves, Ceat, Amtek Auto, TVS Motor Company, Voltas, Apollo Tyres and Aban Offshore. Larsen and Toubro (L&T), Axis Bank, BHEL, ICICI Bank and Maruti Suzuki from the 30-share S&P BSE Sensex have rallied between 55-80% during the period.
In comparison, the Bombay Stock Exchange (BSE) benchmark S&P BSE Sensex and BSE 500 index have gained 26% and 30% respectively from closing levels of August 28 last year. The mid-cap and small-cap indices rallied nearly 40% each during the period.
Ravi Shenoy, assistant vice president (mid-cap research), Motilal Oswal Securities said: "I don't think anything has changed fundamentally. It's liquidity that is chasing these stocks. In addition, I think investors are now entering the market and buying stocks that have not rallied much. As long as the overall sentiment stays positive, mid-cap and small-cap stocks should continue to do well."
"Election outcome is a major driver and I feel that the worst for the Indian economy is behind us. Inflation seems to be under control and recovery in manufacturing could be the key driver going ahead. Indian markets did not participate in the global rally earlier and hence are now playing catch up. The fact that Indian markets consolidated over the last two years suggests that it is now ready for the cyclical bull market," says Kishor Ostwal, CMD CNI Research.
"The best performers will be the mid-and small-caps, which are still languishing as compared to the large-cap peers. I feel the FIIs will turn their attention to the mid-cap and the small-cap segment very soon," he adds.
FIIs continued to invest in India with their net investment touching nearly Rs 81,000 crore ($13.13 billion) since September 2013, as per Securities and Exchange board of India (Sebi) data.
Investor preference has shifted from classic defensive plays like fast moving consumer goods (FMCG), healthcare / pharma and information technology (IT) to high beta and policy reform oriented sectors like capital goods and banking. Stocks from these sectors have seen a sharp rally, with the S&P BSE Capital Goods and the BSE banking index, Bankex, gaining 75% and 48%, respectively during the period.
TVS Motor Company, Apollo Tyres, Arvind Limited, Voltas, HDIL and Balkrishna Industries from the mid-cap pack have rallied more than 100%.
Analysts at Angel broking are positive on several cyclical sectors. "Banks, Auto, Capital goods, Infra and other cyclical sectors are all likely to benefit substantially from an economic upturn, policy reforms and declining inflation. Moreover, these sectors are still trading at highly beaten down valuations making it an ideal time to invest in them," they said in a recent report.
Wabco India and Repco Home Finance are among Shenoy's top mid-cap picks. Though he prefers to play the infrastructure theme through the large-caps like L&T and IDFC, he likes Action Construction in the small-cap space.
"Shree Cement and Madras Cement are our picks in the cement sector. However, if one has risk appetite, one can look at Prism Cement for a turnaround. Among the banking pack, YES Bank can be a good momentum play. We also like Deepak Fertilisers," he adds.