The ride for blue-chips so far, and what we foresee for the next year

Blue-chip stocks refer to pedigree stocks which comprise a majority of the benchmark Nifty or Sensex indices in India. These stocks represent a bulk of the market capitalization and are also a proxy for the growth of the industry in particular and the economy in general. If you were to look at the 1-year return from Nifty at 2.80%, you could be forgiven to presume that the year was lackluster. On the other hand, the blue-chips have displayed huge variance in performance. It was a handful of positive stories that held up the Nifty even as a much larger number of stocks gave deeply negative returns.

Check the comparative table below.

Blue-chips that led the surge in the Nifty in 2018

If you break up the stocks that actually supported the Nifty, there are just three categories. We have only considered stocks that have given annual returns of around 20% and above. One can argue that an 11.63% rise in HDFC Bank is worth its weight in gold considering its market cap. But this runs the risk of making the approach too subjective.

Broadly, there are three positive stories that emerged during the year gone by.

Consumption Theme

The one theme that stood out was consumption. We had stocks like Hindustan Unilever, Asian Paints, and Bajaj Finance ride the consumption boom in a difficult year. Of course, stocks like Hindustan Unilever and Asian Paints also benefited towards the end of the year from lower input costs due to lower crude oil prices. Consumption will continue to drive positive returns in 2019 too.

Business Repositioning Theme

This is slightly subtler and subjective. Some of the companies that benefited from the repositioning theme include Reliance Industries (RIL) and Kotak Bank. While Kotak saw market cap gains on the back of its positioning in corporate banking and retail banking, RIL continued to drive consolidation in the telecom industry. In a tough industry like telecom, Jio enjoys the highest ARPUs and has also substantially broadened its retail franchise. Watch out for positive surprises on a very stock-specific basis in 2019.

Dollar Strength Theme

No prizes for guessing, but stocks like Infosys TCS, and Tech Mahindra were the clear winners of this story. Pharma, could not really benefit as they had larger fundamental challenges to contend with. But the rupee moving from 64/US$ all the way to 75/US$ made life a lot easier for these IT companies. Of course, higher growth expectations from the US and a revival in the EU also helped. These gains are unlikely to sustain in 2019 unless there is a genuine revival in US tech spending.

Blue-chips that put Pressure on the Nifty

On the basis of sheer numbers, the losers far outweighed the gainers during the year. The redeeming feature was that most of the gainers were from the high market cap pack, which made all the difference.

Demand and Pricing Concerns

This concern was most prominent in the telecom and auto space. Jio capturing most of the incremental growth with higher ARPUs was a major cause of concern for Bharti Airtel on this front. With Airtel’s African business IPO still uncertain, the stock fell sharply during the year. Demand concerns also hit Maruti, Eicher, and Tata Motors after months of frenetic growth. Of course, the concern for Tata Motors was more from the receding sales of Jaguar Land Rover (JLR) in China, but Maruti and Eicher had domestic concerns. While telecom margins could be close to bottoming, any global slowdown due to the trade war may be bad news in 2019.

Regulatory Concerns

The big losers in the year were the upstream and downstream oil companies. As Brent crude touched a high of $86/bbl in October, worries of a rising subsidy burden on oil companies came back. In the last couple of months, oil prices have fallen by over 35% but the markets are not too happy with PSU oil companies resorting to acquisitions and buybacks to help the government meet its divestment targets. That overhang will remain, unless there is a quantum shift in the thinking with respect to reforms.

Valuation and Corporate Governance Concerns

Valuation concerns were visible in stocks like Maruti, Eicher, and Indiabulls Housing, but there was a bigger, silent killer of stocks and that was corporate governance. Poor standards of transparency and disclosure resulted in frontline stocks like Yes Bank and Indiabulls Housing take major hits. This will also continue to be an overhang through much of 2019.