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Cyclical Sectors And Their Top Picks

15 June 2022

Have you ever tried a roller-coaster ride?

You feel good while going up. But as it comes down at a faster pace, you experience panic and fear.

In a similar fashion, the occurrence of ups and downs in an economy over a period of time is known as the economic/business cycle. These cycles of an economy can be categorized as expansion, peak, recession, and recovery stages.

As the economy grows, the employment level, production level, sales volume, and income growth as well. The opposite is true during an economy’s decline.

In the stock market, the set of stocks that behave in accordance with these economic/business cycles is called by name "cyclical stocks". In this blog, I will discuss everything on cyclical stocks and the top cyclical sectors.

What Are Cyclical Stocks?

A simple definition for the query of what are cyclical stocks in India is that Cyclical Stocks are the type of equity stocks whose price is affected by macroeconomic or systematic changes in the overall economy of the country.

In any economy, these kinds of stocks rise and fall with the economic/business cycle.

This seeming predictability in the movement of these stocks’ prices leads some investors to attempt to time the market. And hence they buy the shares at a low point in the business cycle and sell them at a high point to book maximum profit.

Let’s consider an example of Automobile stocks.

If the economy is booming, you have good savings. You would consider changing or buying a car or 2-wheeler.

So, the demand for vehicles will go up in a booming economy. Sales will increase. The profits will rise.

Hence, the stock prices will also move up.

On the other hand, during an economic slowdown, when your job security is low and you are not earning enough, buying a vehicle is a luxury.

So, the stock prices of automobile companies will fall.

And hence such stocks are called cyclical stocks.

Top Cyclical Sectors In India

Here is the list of top companies operating in cyclical industries in India-

Cyclical Sectors

Company

Industry

Capital Goods Sector

HEG Ltd.

Manufacturing

Graphite India Ltd.

Manufacturing

NBCC (India) Ltd.

Construction

Honeywell Automation India Ltd.

Manufacturing

Shree Cement Ltd.

Building Materials

BFSI Sector

Federal Bank Ltd.

Banking

HDFC Bank Ltd.

Banking

Kotak Mahindra Bank Ltd.

Banking

City Union Bank Ltd.

Banking

ICICI Bank Ltd.

Banking

Auto Sector

Mahindra & Mahindra Ltd.

Automobile

Eicher Motors Ltd.

Automobile

Bajaj Auto Ltd.

Automobile

TVS Motor Company Ltd.

Automobile

Maruti Suzuki India Ltd.

Automobile

Factors to Consider Before Investing in Cyclical Stocks

There are numerous factors that affect the performance of cyclical stocks India. Thus, before you go ahead with investing in such stocks, make sure you consider the following before-

  • Interest Rates

Interest rates are one of the key factors to look into while investing in cyclical sectors in India. It is usually observed that cyclical stocks fare well when interest rates are falling, and on the other hand, during the rising interest rates, cyclical stocks perform poorly. So it is vital to look into the interest rates well in advance before trading.

  • P/E Multiples

Usually, maximum investors look forward to investing in those companies that have low P/E multiples. But in the case of cyclical stocks, a different approach should be taken up. Since the returns of cyclical stocks fluctuate too much, cyclical stocks having a low P/E multiple can often turn out to be a risky investment. Thus, considering P/E Multiples is of huge prominence.

  • Company’s Balance Sheet

It is also necessary to have a good observation of the balance sheet of the company. Hence, make sure to see its cash position, assets, valuation, and all such factors. Such numbers contribute a lot to the investors while making decisions.

  • Economic Changes

As compared to usual growth stocks, cyclical stocks respond tremendously and quite violently to economic changes. Such changes tend to suffer huge losses during times of recession. So, before getting invested in cyclical stocks, take a glance at the economy as well.

Top Performing Cyclical Stocks: Performance Overview

The Indian economy is passing through a phase of economic slowdown, with the GDP growth registering one of the lowest rates of 5.8% in the last quarter of FY 2018-19.

While there is a consensus that the economy is slowing down, the debate is still going on whether the slowdown is structural or cyclical in nature.

So, it is prudent for an investor to consider including cyclical stocks in their portfolio.

Here are the top 3 cyclical sectors in India you can look to invest in

  • Capital Goods Sector

Capital Goods refer to products that are used in the production of other products but are not incorporated into the new or final product to the consumer.

These include machine tools, industrial machinery, process plant equipment, construction & mining equipment, electrical equipment, textile machinery, printing & packaging machinery, etc.

The top 5 cyclical stocks in India in this sector are-

1) HEG Ltd.

HEG Ltd. is a premier company of the LNJ Bhilwara Group and is currently India’s leading graphite electrode manufacturer.

HEG Ltd.'s manufacturing site has one of the largest integrated graphite electrode plants in the world which processes sophisticated UHP (Ultra High Power) Electrodes.

2) Graphite India Ltd.

Graphite India Ltd. (GIL) is the manufacturer of graphite electrodes, as well as carbon and graphite specialty products in India. GIL has 6 manufacturing units spread across India and also has a 100% owned subsidiary in Nuremberg, Germany, by the name Graphite COVA GmbH.

Incorporated in the year 1967, in collaboration with erstwhile Great Lakes Carbon Corporation (GLCC) of USA, GIL has been continually improving its product quality and services.

3) NBCC (India) Ltd.

Incorporated in the year 1960, NBCC (India) Ltd. is a blue-chip Government of India Navratna enterprise operating in the construction sector.

The company currently is present in 3 main segments, i.e. Project Management Consultancy (PMC), Real Estate Development, Engineering, Procurement, and Construction (EPC) Contracting.

4) Honeywell Automation India Ltd.

Incorporated in the year 1984, Honeywell Automation India Ltd. is a large-cap company operating in the engineering sector. It is in a leadership position in providing integrated automation and software solutions, including process and building solutions.

The product portfolio of this company includes environmental and combustion controls, and sensing control, and also provides engineering services in the field of automation and control to global clients.

5) Shree Cement Ltd.

Incorporated in the year 1979, Shree Cement Ltd. is primarily an Indian cement manufacturer. Headquartered in Kolkata, it is one of the biggest cement makers in the northern part of India and also produces and sells power under the name Shree Power and Shree Mega Power.

  • BFSI Sector

The Banking, Financial Services, and Insurance (BFSI) sector is used to define companies that provide a range of such financial products or services. Core banking, retail, private, corporate, investment, etc are various kinds of banking services available in this sector.

The top 5 stocks in this sector are-

1) Federal Bank Ltd.

Federal Bank is an Indian Private Sector, scheduled commercial bank, headquartered in Aluva, Kochi. This bank has a customer base of around 8 million, including 1.2 million NRI customers and a large network of remittance partners across the world.

Federal Bank Ltd. has remittance arrangements with more than 110 Banks/Exchange Companies across the world and claims to handle more than 15% of India’s inward remittances.

2) HDFC Bank Ltd.

HDFC Bank Ltd. (Housing Development Finance Corporation) is the largest private sector bank in India providing a plethora of banking and financial services to its customer base.

HDFC Bank's product/service portfolio includes wholesale banking, retail banking, treasury, auto loans, two-wheeler loans, personal loans, loans against property, consumer durable loans, lifestyle loans, and credit cards.

3) Kotak Mahindra Bank Ltd.

Kotak Mahindra Bank Ltd. is a private sector bank in India, headquartered in Mumbai, Maharashtra. In the year 2003, RBI issued the license to Kotak Mahindra Finance Ltd., the Kotak group’s flagship company, to carry on banking business in India.

Kotak Mahindra Bank's product/service portfolio includes a wide range of banking products and financial services for corporate and retail customers through a variety of delivery channels and specialized subsidiaries in the areas of personal finance, investment banking, general insurance, and life insurance, and wealth management.

4) City Union Bank Ltd.

City Union Bank Ltd., initially called Kumbakonam Bank Ltd., preferred the role of a regional bank in the Thanjavur district of Tamil Nadu when incorporated in the year 1904.

It offers a gamut of technological services like net banking, mobile banking, self-service kiosks, and financial products. Along with these, City Union Bank offers many loan products to service the financial needs of small individual customers to large industries.

5) ICICI Bank Ltd.

Incorporated in the year 1994, ICICI (Industrial Credit and Investment Corporation of India) Bank is one of the big four banks in India.

ICICI Bank is the 2nd largest bank in India, in terms of assets and market capitalization and offers a wide range of banking products and financial services for corporate and retail customers through a variety of delivery channels and specialized subsidiaries in the areas of investment banking, life, non-life insurance, venture capital, and asset management.

  • Auto Sector

The auto or automotive sector consists of a wide range of companies and organizations involved in the design, development, manufacturing, marketing, and selling of motor vehicles.

It is one of the world's largest economic sectors by revenue.

The top 5 stocks in this sector are-

1) Mahindra & Mahindra Ltd.

Established in the year 1945, Mahindra & Mahindra Ltd. is an Indian multinational vehicle manufacturing corporation headquartered in Mumbai, Maharashtra. It is the largest manufacturer of tractors in the world and one of the largest vehicle manufacturers by production in India.

The company began manufacturing tractors for the Indian market during the early ’60s. Currently, it is the top tractor company in the world (in terms of volume) with annual sales totaling more than 200,000 tractors.

2) Eicher Motors Ltd.

Incorporated in 1982, Eicher Motors Limited is the leading player in the Indian automobile industry. It is the parent company of the famous Indian bike brand Royal Enfield, a manufacturer of middleweight motorcycles.

VECV is divided into these business units: Eicher Trucks and Buses, Volvo Trucks India, Eicher Automobile Engineering Components, and Volvo Eicher Powertrain.

3) Bajaj Auto Ltd.

Bajaj Auto Ltd. is an Indian global two-wheeler company and three-wheeler manufacturing company based in Pune, Maharashtra.

It manufactures motorcycles, scooters, and auto rickshaws. Bajaj Auto is a part of the Bajaj Group. It was founded by Jamnalal Bajaj in Rajasthan in the 1940s.

4) TVS Motor Company Ltd.

TVS Motor Company Ltd. is a multinational motorcycle company headquartered in Chennai, India. It is the 3rd largest motorcycle company in India. The company has an annual sales of 3 million units and an annual capacity of over 4 million vehicles.

5) Maruti Suzuki India Ltd.

Maruti Suzuki India Ltd., formerly known as Maruti Udyog Limited, is an automobile manufacturer in India. It is a 56.21% owned subsidiary of the Japanese car and motorcycle manufacturer Suzuki Motor Corporation.

Should You Invest in Cyclical stocks?

Cyclical stocks India are viewed as more volatile than non-cyclical or defensive stocks, which tend to be more stable during periods of economic declines or slowdown. However, they offer greater potential for growth because they tend to outperform the market during periods of an economic boost.

Investors seeking long-term growth with managed volatility tend to balance their portfolios with a mix of cyclical stocks and defensive stocks.

Conclusion

Investing in cyclical sectors is risky due to the significant ups and downs. Although they carry the risk of loss, you can earn hefty profits when their prices go up. The trick lies in timing the market smartly as per the economic cycle of the country.

But keep in mind that cyclical and defensive sectors are opposite.

Hence, they are good for diversification. Add stocks of both these sectors to your kitty. Remember to strike the right balance between risk and returns as per the investment goal of an individual.

Happy Investing!

Disclaimer: The views expressed in this post are that of the author and not those of Groww.

To read the RA disclaimer, please click here
Research Analyst - Bavadharini KS 

Disclaimer

The stocks mentioned in this article are not recommendations. Please conduct your own research and due diligence before investing. Investment in securities market are subject to market risks, read all the related documents carefully before investing. Please read the Risk Disclosure documents carefully before investing in Equity Shares, Derivatives, Mutual fund, and/or other instruments traded on the Stock Exchanges. As investments are subject to market risks and price fluctuation risk, there is no assurance or guarantee that the investment objectives shall be achieved. NBT do not guarantee any assured returns on any investments. Past performance of securities/instruments is not indicative of their future performance.
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