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Sectoral rankings in February 2024 show realty and PSU banks leading the returns tally

24 Jul 2024 , 02:31 PM

FIRST THE MACRO INDEX STORY FOR FEBRUARY 2024

NSE has just released the index wise performance for its key sectoral, generic, and strategy indices for February 2024. This data is not just about returns; but also, about risk factors (measured by volatility, Beta, covariance and R²) and valuation factors (measured by P/E, P/BV, and dividend yields). Our primary focus is on the various sectors along all these return, risk, and valuation parameters. However, before that, Before we delve into the generic indices first, to get a picture of the macro market colour. Here is the macro story for February 2024.

Since 1 month returns tend to be too volatile, we look at 3 month returns as of the end of January 2024. The Nifty returned an impressive 9.38% in the last 3 months between November 30, 2023 and February 29, 2024. However, the smaller indices did better. For instance, Nifty Mid-cap 100 delivered 12.78% during this quarter while the Nifty Small Cap 100 delivered 12.88%. Nifty Microcap, delivered 13.08%; almost at par.
However, the dichotomies are clearer when you look at a longer time frame. Over the 1-year period, Nifty delivered 28.49% while the mid-cap index delivered 61.56% and the small cap 75.62%. The star was the Microcap index which gave 96.79% in 1 year. The relative performance looks similar over 3 year and 5 year CAGR returns also, although here the mid-caps have outperformed the small cap index.
In terms of risk, the mid-cap, small cap, and microcap have a higher level of volatility but lower beta compared to the Nifty. But, more important is correlation. The mid-cap index has a correlation of 0.73 versus the Nifty and for the small cap it is 0.65, while for the microcap, it is 0.55. Clearly, the smaller names are not only offering alpha, but also a good diversification story when combined with the large caps in the portfolio.
What about macro index valuations? Nifty looks relatively undervalued compared to the mid-cap, small cap, and the microcap. This is across the P/E and the dividend yield parameter. However, alpha normally comes with the penalty of higher P/E ratio.

SOME THEMES THAT STOOD OUT IN THE LAST 1 YEAR

The analysis of Indian markets is not just about capitalization indices or about sectoral indices, but also about thematic indices. Let us first look at some of the key thematic indices that have done very well in the last 1 year to February 29, 2024. Public sector enterprises as a theme have generated more than 100% returns in the last one year. Similarly, defence, a theme that has seen a lot of government orders being farmed out, has also seen strong traction giving more than 100% returns in the last 1 year. Among the other themes that have done well in the last 1 year are energy, mobility, and logistics; all new age themes. What about CAGR returns of themes over a 5-year period? Once again, defence is the star with over 47% CAGR returns over the last 5 years; with PSUs, energy and infrastructure being the other enduring outperforming themes over the last 5 years.

HOW SECTORAL INDICES FARED ON RETURNS AS OF FEBRUARY 2024?

The table captures the key sectors and returns generated across different time frames. The table is ranked on 1-year returns to capture the momentum story best.

Sectoral Index	1-Year Returns	3-Year Returns	5-Year Returns
Nifty Realty	132.46	38.01	32.19
Nifty PSU Bank	90.83	44.16	21.02
Nifty Oil & Gas	66.24	24.93	21.67
Nifty Pharma	63.02	17.69	17.35
Nifty Auto	61.51	27.34	20.95
Nifty Healthcare Index	60.48	19.62	19.47
Nifty Metal	50.98	29.83	24.70
Nifty non-Banks	42.94	14.33	15.83
Nifty Consumer Durables	34.29	15.65	18.66
Nifty IT	29.58	18.04	21.52
Nifty FMCG	21.78	20.73	15.01
Nifty Media	20.70	8.76	-2.81
Nifty Bank	15.50	10.58	12.03
Nifty Financial Services	14.57	9.12	13.42
Nifty Private Bank	13.06	8.20	9.09

Data Source: NSE Indices

The table may look like a melee of numbers, but there are some interesting takeaways.

On a 1-year basis, capturing the momentum of these sectors, it is the Realty Sector that continues to lead at 132.46% annual returns. Housing demand is robust and commercial demand is also picking up from service sector, warehousing, and data centres. State governments are offering special sops in the form of stamp duty concessions and exemptions to help boost the housing demand. RERA has made realty more predictable.
What are the other big gainers and losers on the basis of one-year returns? PSU Banks are an obvious choice with 90.83% returns, but others like Oil & Gas at 66.24%, healthcare at 63.02%, automobiles at 61.51% and metals at 50.98% have done well too. What about the bottom of the heap? Banks are under pressure; and this is largely driven by private banks. Apart from the HDFC Bank results for Q3-FY24, the recent decision by Jefferies to downgrade Indian banks has also played a major part. Even FMCG and IT are among the lower end of the returns spectrum, while the problems for the media sector is largely driven by the problems at Zee Entertainment deal with Sony falling through.
Does the picture change if you look at 5-year returns? The top performing sector in terms of 5-year returns is still the realty sector. In addition, PSU Banks, Oil & Gas, healthcare, and auto are also on the top-5 list on 5-year returns. At the bottom of the heap, we ignore media due to the predominance of Zee; but otherwise, private banks, financials and FMCG are in the bottom segment of 5-year returns too.

The 5-year returns are largely along expected lines, and some of the leadership trends have merely replicated themselves over the last 5 years.

SECTORAL INDICES AND RISK PARAMETERS IN FEBRUARY 2024?

It is said that returns and risk are two sides of the same coin. Higher returns entail higher risk, but higher risk does not automatically guarantee higher returns. Here is a ranking of sector based on 1-year risk parameters.

Sectoral Index	1-Year Volatility	1-Year Beta	1-Year Correlation	1-Year R²
Nifty Media	26.40	1.00	0.38	0.14
Nifty PSU Bank	24.45	1.33	0.54	0.30
Nifty Realty	21.73	1.17	0.54	0.29
Nifty Metal	19.34	1.28	0.66	0.44
Nifty IT	18.52	1.09	0.59	0.35
Nifty Oil & Gas	16.16	1.10	0.68	0.46
Nifty non-Banks	13.83	0.98	0.71	0.50
Nifty Private Bank	13.38	1.10	0.82	0.68
Nifty Auto	13.16	0.85	0.64	0.41
Nifty Bank	13.12	1.10	0.83	0.69
Nifty Pharma	12.59	0.45	0.36	0.13
Nifty Healthcare Index	12.52	0.48	0.38	0.15
Nifty Financial Services	12.51	1.07	0.86	0.73
Nifty Consumer Durables	11.18	0.61	0.55	0.30
Nifty FMCG	10.97	0.62	0.56	0.32

Data Source: NSE Indices

The above table is ranked on 1-year volatility starting with the most volatile sectors and going down to the least volatile sectors.

In terms of standard deviation of returns, the more aggressive plays during the year like PSU banks, metals and realty are at the top; exactly like last month. Ironically, realty and PSU banks also have a high return rank; so higher risk is understandable. However, for metals and IT, the returns are not commensurate with the higher volatility. On the low volatile side, you have the likes of FMCG, Consumer Durables and healthcare, all relatively defensive sectors. Financial services are a surprise inclusion at the bottom.
Let us turn to Beta. Higher the Beta above 1, more aggressive the sector in terms of returns and risk. The high beta sectors in the year were PSU Banks, metals, realty, oil & gas, and private banks. Once again, metals are a case of returns not being commensurate with beta. The low beta sectors were, obviously, FMCG, consumer durables and healthcare; which are relatively defensive sectors. Auto also finds itself at the bottom of the Beta heap; and could be due to high dividend yield in some stocks.
Finally, let us look at correlation and R². Correlation shows whether the sector offers diversification benefits versus the Nifty. Lower the correlation, more the diversification benefit. From that perspective, healthcare, realty, and PSU banks offer the best diversification benefits. The R² shows how much of the performance is explained by the index movement. Obviously, for banks and financials, this ratio is pretty high, while it is low for healthcare, realty, and PSU banks.

In the last 1 year, PSU banks have emerged as an interesting play. They offer high returns, higher levels of volatility; but a good diversification to any large cap portfolio too

SECTORAL INDEX VALUATIONS STACK FOR FEBRUARY 2024

Finally, we look at the sectoral valuations stack on P/E, P/BV and on dividend yield to conduct a quick check on overpriced and underpriced sectors.

Sectoral Index	Price/Earnings (P/E Ratio)	Price / Book (P/BV)	Dividend Yield
Nifty Consumer Durables	71.31	10.12	0.41
Nifty Realty	56.97	5.79	0.25
Nifty FMCG	43.14	11.21	1.93
Nifty Healthcare Index	41.15	5.70	0.58
Nifty Pharma	36.28	5.18	0.71
Nifty IT	32.26	8.19	1.88
Nifty Metal	26.11	2.32	2.47
Nifty Auto	26.10	5.84	0.86
Nifty non-Banks	21.30	3.65	0.85
Nifty Financial Services	17.02	3.19	0.82
Nifty Private Bank	16.22	2.66	0.64
Nifty Bank	15.31	2.68	0.80
Nifty PSU Bank	9.46	1.60	1.53
Nifty Oil & Gas	9.25	2.06	2.54
Nifty Media	0.00	2.19	0.48

Data Source: NSE Indices

Here are some of the key takeaways from the three valuation parameters. Let us look at how the sectors stack up on each of these valuation parameters.

In terms of the P/E ratio; consumer durables, realty, FMCG and healthcare are among the most expensive, with P/E ratios in the range of 40X to 70X. In the case of FMCG and consumer durables, the high premium can be justified by the brand value and the entry barriers built by specialized marketing networks. However, real estate appears to be more a case of earnings struggling to keep pace with valuations as a lot of pent-up demand for realty stocks is chasing short supply. Oil & gas and PSU banks are still available at single digit valuations, but there are two reasons. Being predominantly PSU, government interference is always an overhang. Also, these companies are too liberal on dividend payouts; and that normally does not go well with valuations.
How do sectors stack up on price to book ratio or the P/BV ratio? In a sense this is an extension of the P/E ratio argument. So, you have sectors like FMCG, consumer goods, IT and autos that have the highest ratio of P/BV. The first three are understandable, but in the case of autos, the market valuations have gone up much faster than the pace of asset creation and that could sober once the massive expansion plans show up on the balance sheet. Hence, there would be an element of caution on auto stocks. Unlike P/E ratio, the P/BV has very specific applications for specific situations. P/BV works very well for financial services companies. Also, in the case of long gestation businesses like telecom, internet and green energy, P/BV can be a good proxy for the P/E ratio.
Dividend yield can be defined as the rupee dividend paid out by the company as a ratio of its market cap. Generally, at a sectoral level, the companies with high dividend yield are considered relatively undervalued. The Nifty has a dividend of 1.22%. In terms of sectors, there is oil & gas at 2.54%, metals at 2.47%, FMCG at 1.93%, and IT at 1.88%. Metals are cash cows and high dividends are one way of making the stock attractive, but the cycles are still linked to China demand. The real surprise is the FMCG sector and the IT sector; with dividend yields of 1.94% and 1.84% respectively. For both sectors, the dividend has substantially improved over last few years and that is actually making these sectors attractive at a time when growth visibility is limited.

One last word; high or low P/E ratio or dividend yield is not an advance signal of price movement. That takes time and the bet is that eventually the price should gravitate towards the right value. Also, investors and traders must appreciate that many of these ratios can be irrationally high or irrationally low in the short to medium term. That is the risk in most of the valuation ratios.

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