Opinion The best trades of 2022 – public sector and consumption stocks lead the way

The top trade was undoubtedly that of Adani Enterprises with the stock more than doubling over the year. But that should not come as a surprise. After all, the group has embarked on a breathless pace of expansion (both organic and inorganic) that is perhaps unparalleled in recent times. Share prices of associated companies such as Adani Green have also seen a remarkable surge, catapulting the group into the top leagues of Indian conglomerates.

One should be forgiven for thinking that residential real estate in Delhi, with a price-to-rent ratio that ranges between 40-50, is expensive. Adani Enterprises is currently trading at a price-to-equity ratio of 394 as per NSE. The Nifty50, in comparison, is trading just above 21. So, will 2023 be the year of digesting these gains? Don’t bet on it.

The year also belonged to Indian banks, more specifically to public sector banks, who at last seemed to have turned the corner. SBI is up more than 30 per cent, while Punjab National Bank is up almost 50 per cent. Others like Bank of Baroda and UCO Bank have more than doubled. While private sector bank stocks have also seen a sharp rise – Axis is up almost 35 per cent, while ICICI is up 17 per cent — public sector banks have outperformed their private counterparts by a significant margin. The Nifty PSU bank index is up 70 per cent for the year, while in comparison, the private bank index is up only 21 per cent. This was perhaps to be expected.

Public sector banks have been on a multi-year drive to clean up their balance sheets, and shore up capital. And while there are still some concerns over possible slippages from accounts that were restructured during the pandemic, gross non-performing assets or bad loans were down to 6.5 per cent at the end of September 2022. Moreover, lending is growing at a brisk pace. And banks’ spreads also have improved with the interest rate cycle on the upswing. In typical fashion, lending rates have risen faster than deposit rates. But, as credit growth picks up and competition for deposits among banks begins to intensify, deposit rates are likely to edge upwards, putting pressure on the spread.

Another surprise comes from the stables of the public sector – Coal India. The public sector behemoth, whose stock is up almost 50 per cent, has benefitted from demand rising to an all-time high amidst supply-side disruptions in the global coal market. Higher proceeds from e-auctions have also boosted coffers. To the company’s advantage, the demand-supply mismatch in global markets is likely to persist as long as the Russia-Ukraine war continues. And as the reliability of coal supplies is critical for the power sector, firms like NTPC, with fuel supply agreements with Coal India, are favourably placed. Perhaps that is why the NTPC stock is also up more than 30 per cent.

And while concerns over the unevenness of the economic recovery persist, consumption stocks have fared well. ITC is up more than 50 per cent, as are Britannia (almost 20 per cent) and HUL (9 per cent). But with firms underlining the continuing pressure on volumes — with elevated inflation, real wage growth has been subdued in rural areas — it is likely that in some product segments, the formalisation theme is still playing out. The bigger formal firms gaining market share even as the overall size of the market isn’t expanding as hoped. Among the auto stocks, M&M and Maruti are up 50 per cent and 12 per cent respectively, though Tata motors is down 22 per cent, while among the two-wheelers, both Bajaj and Hero are up.

Infrastructure stocks are a mixed bag. Larsen & Toubro, often thought of as a proxy for the domestic capex cycle, is up almost 9 per cent, recently hitting a new high. Perhaps, this reflects a pick up in the public sector capex or the private sector push under the government’s production-linked investment scheme. But then barometers do go wrong. Among cement stocks, Ultratech is down, though ACC is up, while among steel stocks, SAIL is down, Tata steel is almost flat, but JSW Steel is up.

The sector which has taken a beating has been IT. The Nifty IT index is down 26 per cent. All major IT firms — from TCS to Infosys to Wipro – have witnessed heavy correction. Valuations of the sector will be heavily influenced by market views over the slowdown in advanced economies which are major revenue centres for these firms.

So what do these price signals suggest? One, that investors were better off investing in public sector companies or in firms operating in sectors more tightly regulated/controlled by the government. The Nifty CPSE (central public sector enterprises) index is up 23 per cent. Two, consumption stocks have fared better than infrastructure. The Nifty Consumption index has risen more than the infrastructure index. And three, investors expect the slowdown in much of the developed world to be severe, with grim repercussions for companies with greater exposure. Some of the themes will continue to play out in the new year, while others will probably fizzle out. As they say, the past is not a guide for future performance.

Write to the author at ishan.bakshi@expressindia.com