Post-election Rally

The much-awaited election outcome gave a positive push to the markets. After moving in a narrow range from November 2018, markets started building in a victory for the existing government in February. From November 2018, Sensex has gone up 15%.  From the start of the rally itself, mid of Feb 2019, Sensex has risen 12.3%. This gain is despite the steep fall on a few days since the election results. Here we’ll look at the nature of this rally and which stocks benefited.

Broad based movement

When the markets picked up, sentiment was positive across the board. 392 out of 500 in Nifty 500 stocks gained. The rally was broad based with even the quantum of movement matching with the top stocks. Nifty 50 rose 12.7% while Nifty 500 rose 12.3%. Splitting it into market cap segments, small caps rose much more with an average return of 14.7%. Large and midcaps rose around 11.5% with midcaps rising only a bit more than the former.

Returns as of 31^st May 2019

Sector movements

There was a clear trend with sectors relating to core economy getting a major boost from the election outcome. A stable government is expected to continuity in reforms, long-term policy decisions and efforts to boost economic growth.  Top sectoral gainers were construction, realty and capital goods. These are also sectors that were out of favour for much of 2018.

Core economy sectors

Cement companies were steadily moving up during this period, as companies managed price hikes and better realisations. Orient Cements, a small cap company, rose as much as 80% while JK Cement (up 46%), Heidelberg Cement (up 40%), Shree Cement (up 40%) and Ultratech Cement (up 37%) also gained significantly. Realty stocks saw improvement as they showed signs of climbing out of their troubles., Indiabulls Real Estate (up 73%), Sunteck Realty (up 45%), Prestige Estate Projects (up 35%) and Dilip Buildcon (up 30%) were the major gainers. Some infra and capital goods companies which heavily bled in 2018 quickly shot up in this rally. Some of them are Sadbhav Engineering (up 55%), Bharat Electronics (up 49%) and BEML (up 33%).

Oil and gas

Oil companies began picking up along with the broader markets. Being an important segment of the economy, any improvement in demand is likely to convert into bigger profits for these companies. Pressure from high crude oil prices waned, as did pre-election political pressure that prevented passing on of higher crude oil prices. Oil Marketing Companies such as HPCL (up 48%), IOCL (up 28%) and BPCL (up 21%) jumped. Other gainers were Gujarat State Petronet (up 24%), ONGC (up 21%), Indraprastha gas (up 19%) and GAIL (up 12%).

Banking and Finance

Finance companies hogged the limelight with a number of them moving up significantly. Aavas Financiers (up 52%), Magma Fincorp (up 49%), Can Fin Homes (up 47%) and Reliance Nippon Life Asset Management (up 45%) are some examples. Stocks which had already run up in 2018 such as Bajaj Finserv (up 38%), Bajaj Finance (up 36%) and Gruh Finance (up 30%) also participated in this rally.

Among banks, smaller ones gained the most with an average return of 23%. The Jammu & Kashmir Bank (up 52.6%), DCB Bank (up 35%) and Lakshmi Vilas Bank (up 32%) were on top. Public Sector Banks also saw a turnaround with SBI (up 34%) leading the pack. Heavily beaten down ones such as Bank of Baroda (up 32%), Indian Bank (up 32%), Bank of Maharashtra (up 31%) and Canara Bank (up 27%) recovered. Only 4 banks in total did not rise during this period among which was Yes Bank (down 27%).

While the rally lifted several beleaguered sectors, key sector auto remained subdued as sales continued to flag. Given the high frequency of data points in this sector, sustained poor numbers can keep it down. Among other stocks to have sat out this rally, several were troubled ones. Prominent in this category were Anil Ambani group stocks. Reliance Communications is the major loser with its value shrinking over 65%. Other stocks such as Reliance Power (down 31%), Reliance Infrastructure (down 15%), Reliance Capital (down 14%) and Reliance Home Finance (down 13%) also lost.

Jet Airways lost around 35% as the debt-ridden company was struggling to find buyers. Similarly, Yes Bank (down 27%) and Zee Entertainment (down 18%) also lost as corporate governance and debt issues surrounding the companies haven’t yet found any resolution.