Among the sectors which beat the 26 per cent return delivered by the Sensex in 2012 were banking and automobiles. The former, with a return of 55 per cent, was the best performing index this year. The latter, with 39 per cent gains, was among the top five sector outperformers.
Both sectors had a forgettable year in calendar year 2011, with the BSE Bankex falling 32 per cent, while the auto index did relatively better, curtailing the fall to 20 per cent. This year, while private banks lead, with YES Bank and IndusInd Bank dominating the charts, the revival in Jaguar Land Rover (JLR) volumes and resolution of labour disputes helped Tata Motors and the king of small cars, Maruti Suzuki, make investors richer upwards of 60 per cent.
The year belonged to private sector banks, rewarded by the markets for strong and consistent financial performance, stable asset quality and bright prospects. Some such as HDFC Bank are viewed by experts as a defensive play, as investors increasingly chose the safer havens to park their money. Asset quality of public sector banks (PSB) worsened more than anticipated and resulted in these stocks trading at a seven-year high discount to their peers in the private space. Thus, asset quality parameters took centre-stage and became the key determinant to the price movements of banking stocks. The largest lender, State Bank of India (SBI), witnessed sharp deterioration in its asset quality, as many companies (aviation and power segments) defaulted.
Among private banks, Axis, initially beaten down by asset quality concerns, managed to perform better than expected. Hopes of steep rate cuts did not materialise, as the Reserve Bank of India (RBI) announced its only repo rate cut of 50 basis points (bps) in April. This meant continued pressure on credit offtake (especially by India Inc) and higher cost of funds for the banks. In fact, some mid-sized PSBs also witnessed sluggish growth in loan books over FY12.
On the policy front, the year was a mixed bag. While RBI announced stricter provisioning and capital requirement norms, it eased banks' cash reserve ratio to infuse liquidity in the system. The year also witnessed the full impact of the savings rate de-regulation announced in October 2011, as banks with lower Casa (current and savings account) deposits offered higher rates. However, the churn of savings bank account holders was limited due to the service-driven nature of these accounts. The real cheer for this sector came when the Banking Laws Amendment Bill was passed by Parliament. This sent stocks of non-bank finance companies (NBFCs) and old private banks such as Karnataka Bank and South Indian Bank, which could be potential takeover candidates, spiralling. The sector will be dominated by two key themes in 2013. One will be the impending rate cuts (experts peg it at 100-125 bps in 2013) and the second is the issue of new banking licences. While the sector, as a whole, stands to gain from rate cuts, via higher credit offtake from companies, a host of NBFC scrips such as M&M Financial Services, L&T Finance and Shriram Transport are likely to move in line with developments on the banking licence process. Experts do not rule out increased consolidation in the sector after the new licences are issued.
Further, asset quality trends will be watched closely and would act as a catalyst for PSBs. Though most analysts remain positive on private banks, many believe the current valuations will cap significant upsides from hereon. Anish Tawakley, analyst-financials, Barclays Equity Research, says: "Private bank stocks have run up quite a bit and I don't think we could see significant upsides from these levels." HDFC Bank and ICICI Bank remain the preferred pick of most analysts in the private space, while amongst the mid-caps they like IndusInd Bank and YES Bank. Notably, these have displayed strong performance on the key parameters of credit growth and asset quality, a trend expected to continue in FY14 as well. Within the PSB space, while the Street view remains mixed on SBI and will watch for sustained improvement in its asset quality trends, Bank of Baroda remains the top pick of most brokerages.
The automobile sector did not have a great year, with the disappointment led by the passenger car segment. This was impacted due to the economic slowdown, capacity constraints and labour issues at Maruti Suzuki . Given that the segment is expected to report flattish volume growth for FY13, this is the second year in a row (two per cent growth in FY12) when car volumes are likely to be muted.
Going ahead, led by expectations of a fall in interest rates and economic recovery, analysts expect the sector to grow at a robust pace. Ashvin Shetty of Ambit Capital expects the passenger vehicle industry to grow at an annual rate of 12.5 per cent between FY13 and FY15. It would be a smart recovery if it comes about, since the sector grew annually by just five per cent over the past three years.
Unlike cars, utility vehicles are expected to grow 30 per cent this financial year, on the back of successful new launches (the XUV 500, Ertiga and Duster) and the preference for diesel-powered vehicles. Despite increasing competition, a 13-15 per cent growth in FY14 for the segment, success of the Quanto and a revival in tractor volumes, led by higher food prices and a better rabi outlook, augur well for M&M. The scrip remains a buy for most analysts, with a target price of Rs 1,100.
Analysts bet on Maruti due to its lower foreign exchange risk, rising exports, an improving product mix, price rises and a fall in discounts. The target for the stock, trading at about Rs 1,480 and having given a strong 68 per cent return over the past year, is pegged at Rs 1,700, an upside of 15 per cent over the next year.
For two-wheeler companies, volumes have grown modestly in the past year due to higher fuel prices and dip in demand. Had it not been for Honda Motorcycle and Scooter (year-to-date sales up 41 per cent), the two-wheeler sector would have registered a fall in sales for the year to date. The other three majors - Hero MotoCorp, Bajaj Auto and TVS Motor - recorded a fall in growth of three to seven per cent.
The segment which has worked so far for automobile majors is the 110-125cc one. This is due to the affordability/downtrending factor, while executive and premium vehicles have suffered. Elara Capital analysts say given a high base for the next six months, two-wheeler volume growth should stay below double-digit levels till at least the first half of FY14.
While Bajaj Auto's foreign presence helps it to cushion the impact of a slowdown at home, most analysts do not prefer the stock due to a sharp run-up in prices. Over the past year, while Hero delivered flat returns, Bajaj Auto gained 33 per cent and is quoting close to fair value estimates of most analysts.
While light commercial vehicles are topping the sales volume charts and are likely to end the year with 21 per cent y-o-y growth, medium and commercial vehicle (M&HCV) makers have had a disappointing year thus far and expect a fall of 10 per cent in FY13. Kapil Singh of Nomura believes profitability for the standalone business of Tata Motors, the best-performing stock this year, remains under pressure due to a decline in M&HCV volumes and higher discounting/lower volumes in the passenger vehicles business. Higher volumes by JLR are already discounted in the price, he says. Ashok Leyland should continue to lose market share, given the intensifying competition.