Beaten-down sectors lead the rally


K.Venkatasubramanian
Aarati Krishnan

What is the investment that can deliver a 20 per cent return in three weeks? Believe it or not, the answer is still 'stocks'.

As many as 417 stocks have gained 20 per cent or more during the recovery in the stock markets over the past three weeks. As many as 23 of these have appreciated by over 50 per cent, with a couple (Shriram EPC and Sabero Organics) even doubling in value.

As the BSE Sensex bottomed out at 12600 levels on July 16 and climbed back over the next three weeks to 15000 levels, it has managed a 20.6 per cent return. The stocks which beat the index were not mainly penny stocks, as you would expect.

Punj Lloyd (up 45 per cent), HDFC (up 44 per cent), DLF (41 per cent), HDFC Bank (39 per cent) are some of the frontline stocks that substantially outpaced the Sensex. Stocks from unlikely sectors such as sugar, banking and realty have led the rally.

Expectations of reforms drove stocks of public sector banks, to the top of the gainers list. SBI, Union Bank of India, Indian Bank and Bank of Baroda rose between 34 and 46 per cent.

Realty majors – DLF, Unitech and Kolte Patil Developers – delivered between 30 and 63 per cent returns. Among private sector banks and financial institutions, ICICI Bank, IDBI Bank, Edelweiss Capital and Reliance Capital rose between 38 and 46 per cent.

These sectors are interest rate sensitive and declining crude oil prices have triggered hopes that interest rates could soon peak out. Beaten down valuations may also explain the buying interest in these stocks.

Sakthi Sugars, Dharani Sugars, Dwarikesh Sugar and EID Parry gained between 42 and 70 per cent, as sugar prices rose on expectations of a drop in output next year. Stocks such as RNRL, Shriram EPC, Adlabs Films, HMT and Jet Airways may not have had any specific triggers, but delivered 39 to 105 per cent returns.

Large cap stocks outpaced mid and small-caps, as buying interest first revived in the frontliners. Stocks with a high PE multiple delivered better returns in this rally than those with a low PE ratio, also reflecting the fact that investors preferred to buy better-known names.

Stocks that managed to beat the Sensex had an average PE of 20.7 times (trailing earnings), higher than the Sensex PE of 18.8 times. Those which trailed the index sported a PE of 17.8 times, at a discount to the index.

FIIs have been net buyers to the tune of Rs 2,252 crore in Indian stocks since July 16, while domestic mutual funds have bought Rs 583.9 crore worth of equity.