Home / Market / Mark-to-market /  Marking Modi to market

The equity markets welcomed the exit polls predicting a likely victory for the Bharatiya Janata Party (BJP) in four states, or at least three out of four states, with a 1.2% rise in the S&P BSE Sensex. While the markets opened in a euphoric mood on Thursday morning, it gradually gave up some of the gains through the day.

The Nifty ended 1% lower compared to its highs in the first few minutes of trading. What’s more, as one technical analyst points out, the outstanding positions on the country’s top-traded Nifty contracts rose by about 6% on Thursday which, on the back of the downward price pressure through the day, indicates that fresh short positions were created. Of course, there may have been some profit booking, too.

There’s little doubt that the markets would welcome a Narendra Modi-led government and foreign institutional investors such as CLSA and Goldman Sachs have made no bones about this. But the market also realizes that while a favourable result in the state elections could boost BJP’s chances in the national elections, there’s still a long and rocky road ahead. Bank of America Merrill Lynch, for instance, points out that in 2003 BJP won three of these four states (nobody seems to be interested in Mizoram), but lost the 2004 elections. Nevertheless, as the chart shows, markets usually do well in the run-up to the elections, a likely outcome this time given the gloom and doom all around.

On Thursday, the rally was led by the cyclicals, with the BSE Bankex gaining 4.44% and the BSE Capital Goods index up 3.59%. We consider below a few sectors that may benefit from a political change at the centre:

Capital goods and infrastructure

That the infrastructure and capital goods stocks will react positively to a BJP-led government is evident from the following fact: since mid-September, when Narendra Modi was announced as BJP’s ministerial candidate, the BSE Capital goods index (which is fairly representative of cyclicals and industrials) has rallied 47% till date, while the BSE Sensex has risen by around 15%.

Much of this optimism is based on the assumption that a BJP-led government would be more business-friendly and will boost business confidence. There seems to be consensus on the Street and in industry circles that the new order could iron out structural issues related to environmental clearances, fresh contracts and the revival of old projects that were in limbo. Analysts’ data indicate that work has not started on more than 80% of the build-operate-transfer road projects awarded in fiscal 2012 and 2013. And those awarded earlier are barely half-way through to completion.

Consider the power sector, where most private producers’ projects are jeopardized due to non-availability of fuel, both coal and gas. Most power units are operating at below optimal plant load factors, leading to bleeding profit and loss accounts and debt-laden balance sheets. The perception is that a new broom is badly needed in the sector.

Given that Modi is viewed to be a pro-industry reformist, it is likely that stumbling blocks to infrastructure development like clearances and regulatory issues will be ironed out. This will enthuse new entrants and old players to participate in fresh contracts, as and when they come up. One may recall that the BJP-led government in 1998 had put the latest Electricity Act in place, increasing the interest of private companies in the sector.

However, all this would take at least a year from the time the new government is formed—which would be mid-2015. Besides, the sector is suffering from a complex web of adverse factors such as high cost of capital, issues related to land acquisition and concerns about growth. The cost of domestic capital is unlikely to come down soon, given the high inflation, which a change of government can do little about. High interest rates are a deterrent to economic recovery and consequently a dampener for the capital goods sector.

Valuations in the sector have run up, but a report by Motilal Oswal Securities Ltd says that the capital goods sector is trading at a 46% discount to historical price/book ratio. In any case, the sector is at an inflection point. It has languished for the last three to four years and things can hardly get worse. As a matter of fact, if a BJP-led government is formed next year, it will benefit from the slight upturn in the economy that is already in place. That is why infrastructure and capital goods stocks may do well.


Banking stocks jumped on Thursday simply because they are often seen as a proxy for the economy and the big hope in the market is that a BJP-led government will be able to revive growth. At the moment though, the sector is plagued with myriad problems, such as rising bad loans, low deposit growth and high interest rates. Banks are understandably reluctant to lend. These issues are unlikely to go away in a hurry and it will take time for a full-fledged recovery. Nevertheless, the key for any recovery is a revival in animal spirits, as Prime Minister Manmohan Singh has pointed out. The irony is that the animal spirits find BJP to be more congenial.

Oil marketing companies

Stocks of Indian oil marketing companies (OMCs)—Bharat Petroleum Corp. Ltd, Hindustan Petroleum Corp. Ltd and Indian Oil Corp. Ltd—rose in the range of 1.5-5.8% on Thursday.

The reason is simple. The last time BJP was in power, it deregulated fuel prices. In fact, OMC stocks performed well during the BJP regime. According to Motilal Oswal Securities, “in the last 14 years, OMCs have outperformed the broader markets in five financial years and have performed largely in-line with the broader markets in four financial years". Importantly, “the four-year outperformance during FY01-04 was driven by the multiple reforms roadmap announced by the government in 1997, particularly in fuel price deregulation", pointed out the report.

Investors are hoping the situation as far as oil sector reforms are concerned will improve and accordingly lead to a re-rating for the sector. But then, diesel prices are anyway on the road to getting de-controlled, albeit at a glacial pace. So, it is the extent of the reforms that will determine the performance of OMC stocks.


The metals sector is currently weighed down by both global and domestic factors. The global economy has slowed down at a time when new capacities are coming on stream, which is forcing companies to shutter ageing/unviable plants to prevent a glut from ruining prices. The export market for metal is therefore under stress.

At home, not enough projects are taking off—either in the industrial or infrastructure segments—thereby affecting demand for metals. Consuming sectors such as automobiles and real estate too are in slowdown mode. Domestic metals’ capacity has increased as companies planned for an explosion in demand that has failed to make an appearance.

Now, a new government cannot do much about the global situation. In the domestic market, a new government can do little to revive demand till the fiscal situation improves.

But there is one area where a difference could become visible—clearances. Large projects of metal companies (and other sectors too) are stuck because of delays in getting approvals. A new government could help projects take off and restore confidence in entrepreneurs, investors and banks to start investing once again. But there is the matter of getting state governments to co-operate to get local clearances, and that could be a stumbling block.

The sector is not a market favourite at the moment. The BSE Metals Index is down by 8.2% from a year ago, compared to a 7% increase in the broad market. Most stocks in the metals index are down though it is skewed a bit by a 25% decline in the price of Coal India Ltd, which is included in this index.

Any positive changes by a new government will take a long time to show results. But improved investor sentiment could reflect in higher valuations earlier than that. Yet it is not that the sector is cheap. The BSE Metals Index is trading at a price-to-earnings multiple of 26.7 times its trailing four-quarter earnings.


Will a new government not scared of the ghost of the 2G scam be able to help the telecom sector? Telecom stocks were relatively subdued in their response to the results of the exit polls. The reason for this is simple—while it’s likely that a BJP-led government may bring more regulatory certainty, the difference isn’t expected to be very much. This is because while the current government has taken a long time to frame policy on issues such as merger and acquisition guidelines, rationalization of spectrum usage charges and spectrum trading, it is now nearly done with these exercises.

According to an analyst with a domestic institutional brokerage, one shouldn’t expect any dramatic change for the sector with a change in government. One positive could be if the rupee strengthens considerably, leading to lower debt servicing obligations for companies such as Bharti Airtel Ltd that carry foreign debt.

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