Sector Analysis

Banking and Finance

Banking and Finance is the backbone of any country.  People, Industries and the Government, everyone is in need of credit. The lower interest rates will also increase the credit demand moving forward, therefore allowing banks to increase their profitability.

Increase in the interest rate will also support banks as banks can charge more interest on the leant money

These are very sensitive to Country’s Economy. During economic boom or a recession Banking and Finance generally are the first one to take it on their chins  

Information Technology

IT sector further can be diversified into two, one that manufactures products and the other that provides services. Manufacturing company’s becomes a price competitive business because companies will have to offer products at cheaper rates, which will weigh on their profit margins. Ex. (Phone Companies, Laptop Companies, etc). There can also be certain exceptions like Microsoft or Apple. The second part is one which provides services. If the quality of the services provided is good then the clients will be ready to pay for the same, therefore in turn it helps the company to expand their profit margins, but with certain exceptions (Ex. TCS, Infy, etc)

Airlines

Airlines are a price competitive business. When people want fly out to any place by plane first they look for price of the tickets. There is a lot of competition among the airline companies to offer tickets at a cheaper rate so that they can attract more customers. This in turn will weigh very largely on company’s profitability. Even during oil price booms, these companies cannot expand their margins due to this competition. Therefore, these company’s show very less or almost no growth.

Automobiles

Automobiles are cyclical sector. There won’t be consistency in their profitability in the short term, but over a long period of time these companies’ tend to grow due to sales growth. These companies usually will have to spend more on R&D and also slightly affected by the competition, but over long term sales growth will help in to increase the profitability. This sector will generally tend to saturation in well developed countries; they are better bets in developing countries.

Pharmaceuticals

Pharmaceuticals are defensive sector. The sector will be very consistent in terms of growth. The company needs to spend lot of on R&D therefore affecting the company’s profitability. The sector as such will be very consistent in terms of growth. Even the sales volume will generally remain to be consistent irrespective of economic recession or booms.

Automobiles v/s Pharmaceuticals

Automobiles and Pharmaceuticals both are fast growing sectors. Pharma’s always have an upper hand over Automobiles only due to their consistency and unaffected profit growth during turning of economic cycles, since Pharmaceuticals are businesses under defensive sectors and automobiles are cyclical, the automobile sector can also tend to saturate over a long period of time.

Metals

Metals are one of the slowest growing sectors. High loans and heavy interest payments will drain out most of the profits. Heavy expenses in R&D, lower profit margins due to competition and fluctuations in commodities makes metals one of the worst sectors to invest money into. One of the exceptions is HindZinc, Complete monopoly helps it to increase its profit margin even during commodity meltdowns and it being a zero debt company helps it to retain most of the cash generated, thereby helping the company grow consistently.

Teleservices

Teleservices are comparatively slow growing sector. It is a defensive sector and can be both price competitive as well as durable competitive business. It is generally volume driven and competition may affect the margins to a certain extent. Companies with high debt are usually better to avoid.  

Consumer Non-Durables

Consumer Non-Durables Are Defensive sector and a Durable Competitive. These companies can maintain consistent margins and over a period, the increase in volumes will drive up the profits. They aren’t fastest growing sector one can find on the Street, but good Consumer Durable as well and Consumer Non-Durable companies can offer good growth and are generally safe bets.

Auto Ancillaries

Auto Ancillaries are sort of defensive sector. The demand for the Auto-Parts will be there before the sale of automobile and post the sales too; therefore, due to constant demand these companies can do well in long term, and they generally are good bets and these companies are usually fast growing too.

Capital Goods

Capital Goods is a Price Competitive sector. It is not highly affected by the price competition, but certainly, competition will affect margin expansion. The profitability varies based on the commodity prices, but good growth in sales will make sure that the company grows consistently. 

Preferences 

Sectors with Primary Preference: Finance, Technology, Pharma, Consumer Non-durables

Sectors with Secondary Preference: Automobile, Auto Ancillaries, Teleservices, Capital Goods

Sectors with Least Preference: Air Lines, Metals, Realty

Note: Companies in slow growing sectors can also become excellent investments if they possess an Economic Moat.