While discussing how you can diversify your portfolio, we have analyzed the sectors in which you may make an investment. You need to analyze the sectors which may enable a satisfactory return in the long term. In order to make money in the stock market in the long run, you need to invest your money in the growing sectors or industry. Here we will analyze the five competitive factors that shape every industry and help to determine the weaknesses and strengths of any specific industry. In this column, we will make use of Porter’s five forces for analysis of strength and weakness of any specific sector or industry and guide you to choose which are the top 10 best sectors to invest in India for long term.
Points to consider while choosing the best sectors to invest in India
There are many sectors across the world. They have different revenue models, i.e. how the company makes money, profitability, marketing strategy, etc. According to Porter, there are five undeniable forces that play a vital role in every market and industry in the world and they are
- Competition in the market or industry,
- Potential of new entrants’ into the industry,
- Power of suppliers,
- Power of customers,
- The threat of substitute products.
Competition in the market or industry
In every industry or sector, there is a chance of competition or it is quite inevitable. Every business faces competition from other rivals. It is a matter of concern for a company or business person how strong the competitors are. You as an investor should check and verify the ability of the peer companies competing in the same industry. You need to check out the capital structure, business model, the quality of products or services, etc. which the companies sell. In some businesses, competition is at an extreme level. In that situation, companies have to offer products or services at a discounted price. On the other hand, if a company has no rival or business is competition-free, the company can enjoy a monopoly and get success easily.
Companies run the business by buying some raw materials and then produce some products or finished goods or items and then sell them to the consumers. It means the company buys raw material or any technology or any service or anything from a supplier. There may be many suppliers. Now, you should check whether the suppliers can increase the price of the raw materials. This will definitely affect the profit margin of the respective company. Now, when the prices of the raw material or any other equipment are costlier from one supplier, companies usually buy the required items from different suppliers. Thus the company may shift from one supplier to another in any emergency situation. If the number of suppliers is low the companies will be more dependent on them. The suppliers are in a stronger position. This may impact the company’s profit.
The earning comes for the products and services offered or sold by the companies. You should check how many buyers the company has, especially the regular ones. You can figure out the prices offered by the company you want to invest in comparison to the rival companies. The number of customers is obviously the power of the respective company. You need to ensure that whether the company gives quality services at an attractive rate so that the customers do not move to the rivals.
Threats of substitution
The products and services of any company always face the threat of substitution. A new rival company may substitute the products of any company. We can take the example of Chinese products from electronic items to toys. Chinese products have substituted Indian products. Although they are harmful to our body, because of the cheap price of the products people buy them. This kind of substitution is possible in every field. Every company remains under threat that any other rival may produce the same products at a cheaper price to attract customers. While making an investment in a company, you should see what the company produces and if there is any possibility of replacement of the same items by any other company.
The threat of new entry
If you are dealing in a business that can easily be penetrated, many competitors may arise affecting your business. A business holder should be aware of the newcomers in the sector. For example, a restaurant is an easy business. So, it always faces threats of new establishments by newcomers. On the other hand, it is quite difficult to set up an Insurance company. The insurance company requires huge capital and a broader infrastructure which would satisfy rigid and stringent government regulations. So, the position of any company in any business may be affected when more and more competitors enter the same business. When you choose a sector you can see whether the sector faces the threat of new entry.
- Read also: All Sectors – The Economic Times
Now, we will make use of this theory to analyze the industry and find an investment opportunity in the sectors for a long horizon. If you want to invest in any sector or stock you need to consider the future potential of the sector, competitive advantage, whether the demand of the sectors or products will remain constant in the near future, the growth possibility, if the industry or sector has any strong entry barrier, etc. before making an investment. You need to consider the above-motioned points.
Points to consider
We can take examples of mining and utility products. They have delivered better returns in the recent past, but now they are not able to deliver a satisfactory return and their future possibility is also less. So, as a smart investor, you may choose the sectors which have an untapped market opportunity and has a strong growth opportunity in the near future. We have discussed some sectors which have the following entry barriers namely,
- These sectors have prestigious and established brands that work as a strong entry barrier for newcomers.
- The existing companies have various patents.
- Irrespective of software company or an FMCG company or insurance company, one needs to fulfill a number of legal requirements and stringent Government policy.
- High capital requirements.
- The suppliers are already satisfied with the profitability that the traditional brands offer and they do not prefer to take a risk with the new entrants.
Top 10 Best Sectors to Invest in India
The banking sector is the base of the Indian stock exchanges. The banking sector comprises of govt. and private banks, many other financial institutions, etc. Among all the banks 9 banks open their stocks for the public. There are 9 Banking Stocks in the benchmark index NIFTY 50. These stocks altogether occupy 18.56% to NIFTY 50. Govt. banks have been approved of a huge amount of loan of Rs. 80,000 crores by the central govt. of India. This fund is to be utilized as a recapitalization for the banks. This fund is expected to manage bad loans.
According to Indian experts, the revival of our economy is not possible without the contribution of banking stocks. Keeping this in mind, investors have extensively invested in the banking sector in the last 5 years. As far as mutual funds are concerned, the banking sector has received maximum investments followed by auto and IT sectors.
Why the Banking Sector
Today, every bank’s stock is considered bullish (will increase in price in the future) by many experts, and it is recommended that you buy and hold banking stocks as long as possible. The Banking industry will continue its immense growth owing to the following factors,
- Banks have made the life of the common man easier by hassle-free i.e. without visiting banks during banking hours various services on the fingertips i.e. mobile banking, internet banking, instant fund transfer, ATM services across the country on the wings of new technological advancements.
- Banking industry offers various services namely deposit of money, insurance services i.e. health insurance, term insurance, loan facilities, investment opportunity i.e. either direct equity by opening a Demat account or via a mutual fund, payment of utility bills namely electricity bills, municipal taxes, income tax, etc.
- With the economic progression, the real disposable income of the people is increasing thereby this will raise the demand of banking and related services.
- Large manpower with relevant banking skills to manage the operations thereby increases Productivity and Profitability.
State Bank of India, Indian Bank, Punjab National Bank, are the well-known PSU Banks and HDFC Bank, Yes Bank, Kotak Mahindra Bank are some Private Banks of the Banking sector.
The modern age is called the age of technology. Everything is being now operated by technology. Information technology is the most growing sector of allowing to technological advancement, economic needs, and Government initiatives like Digital India, etc. Day by day human life is getting dependent on this sector. There is a great demand for information technology and this sector has a vast area to grow. Whatever the companies operating in this sector has performed well and delivered robust performance year on year and will continue the pace in the near future. Obviously, investors are getting profited also. The Information Technology industry will continue its immense growth owing to the following factors,
- Owing to the IITs and NITs large skilled professionals are available who can adapt themselves to advanced technologies with ease.
- Government initiatives such as stringent copyright act, Technologies Park, smooth implementation of corporate governance, building infrastructure i.e., hi-tech building to accommodate the software companies and their staff too.
- Highly skilled professionals with low wage structure in comparison to international markets.
- The export of software, as well as the domestic demand in the recent past, has been consistently growing. The best example is online exams for government jobs as well as private jobs.
There are some big guns in this sector in India like TCS, Infosys, Wipro, Tech Mahindra, etc. Apart from them, there are also some growing players like eClerx Technology, 8K miles soft, etc. in which an investor may invest among the midcap stocks for better returns.
Fast Moving Consumer Goods (FMCG)
FMCG refers to those items or products which are utilized by anyway for human living on day to day basis. Actually, FMCG includes all the basic items or products necessary required for living like various food items like rice, wheat, vegetables, oils, beverages, packaged food items, cosmetics. All the things are required for everyday living and will be required in the future also. The demand for these products will not decrease. So, companies producing these products or are in operating with their business are doing good business. These companies will profit in the future also.
In a recession or due to any emergency situation people may not buy automobiles items, may not invest in real estate, may not withdraw loans to buy luxurious items, but will not stop using the above-mentioned products. So, the demand for FMCGs is not going to decline in any situation. Usually, FMCG stocks are the safest bets. If you are a defensive investor, you can invest in this sector. The FMCG sector will continue its immense growth owing to the following factors,
- Low operational costs
- Presence of established distribution networks in both urban and rural areas across the country
- Presence of well-known brands like Nestle, HUL, Dabur, etc. in the FMCG sector
- It has a broader market of 121 crores.
- With the rising economic condition of the country, people have more disposable income to spend.
HUL, Dabur, ITC, Emami, Nestle, Britannia are the well-known brands of the FMCG sector.
Non-banking Financial Institutions
NBFCs provide easy loans with an affordable interest rate. With this loan, a person can buy a house, car, Smartphone, computer, laptops and many other consumer durables. There are companies that provide loans to buy the above-mentioned items. There are several companies that give housing loans only. They are usually called housing finance companies.
Whatever, in these days the nonbanking financial institutions operate in small cities besides big cities. They have made access to the rural areas also. If you want to buy a Smartphone, you can get an easy loan on EMI options at affordable interest rates from the retail shop from where you buy the Smartphone. This loan is provided by actually any NBFC. Anyone can withdraw loans like this. NBFCs have now access to almost everyone. NBFCs provide easy loans even at 0% interest rates on some occasions. People prefer NBFCs in comparison to bank loans.
Points to consider,
- You can get easy loans at affordable interest rates from any vehicle stores or shopping malls with a pan India network.
- Easy EMI option is available.
- Less documentation at the retail shop in comparison to banks.
- A strong relationship with the public which attracts more revenues.
Bajaj Finance, Bajaj Finserv, Capital First are the well-known brands among the companies who are Non-Banking Financial institutions. Owing to the housing for all projects initiated by the central government, many housing finance companies such as LIC Housing Finance, PNB Housing Finance will get a boost.
- Read also: Top 10 Blue Chip Stocks to Buy in India
This is one of the greatest sectors to invest in. It is still growing and this growth will continue in the near future on the wings of economic development, continuous product innovation, technological advancement i.e. electric vehicle, alternative fuel such as shell gas, CNG and use of renewable sources of energy such as solar power, wind energy and increase in demand of luxury commercial vehicles in developing countries like India. The automobile industry will show immense growth owing to the following factors.
- With the increasing disposable income owing to the economic progression, the demand for luxury commercial vehicles will increase year on year.
- Due to the introduction of fuel-efficient vehicles as well as the electric vehicle the demand is increasing.
- The advent of Electrical vehicles & alternative fuel such as Shell gas, CNG and use of renewable sources of energy such as solar power, wind energy have reduced the fuel cost thereby increasing the demand for vehicles.
- Assistance from the Government to set up manufacturing plants to boost the economy.
- Availability of a good technology base at a low cost.
Eicher Motors, Maruti Suzuki, Mahindra & Mahindra, Minda Industries, Motherson Sumi, Exide Industries are the well-known brands of the Automobile sector.
Note: This is the few lessons from the book which I discovered from Christopher H. Browne’s brilliant book ‘The Little Book of Value Investing’. Get the Book from Amazon.
Good or developed infrastructure is the identity of a developed country. Infrastructure means roads, buildings, flyovers, airports, rail services. Indian government works relentlessly for improving its infrastructure to attract more foreign direct investment. Recently govt. of India has launched the Bharatmala project to build national highways for infrastructure development across the country. Only proper infrastructure can pave the way for development of the country. Obviously, this is a vital sector and in India, it has a great growth opportunity. You need to consider the following factors.
- Owing to the ‘Housing for all’ project the housing companies will get a boost.
- The skilled labour force at low cost is available across the country.
- Availability of raw materials and natural resources which help to boost the sector.
- The public-private partnership will boost the infrastructure sector in the near future.
Bharti Infratel, Hindustan Aeronautics Ltd., Larsen & Toubro are the well-known brands of the Infrastructure sector.
In your neighbor or among your relatives or even in your family, you can see that many people are suffering some kind of physical ailments. Though it sounds quite pity, the harsh reality is in every family there is a patient who suffers from ailments of any kind. We should admit and accept the reality that almost everyone has physical ailments and so the person has to take medicine or medical treatment. So, the market of pharmaceuticals is the evergreen sector to invest in. The sector has the following advantages,
- Indian pharmaceutical products are available in over 100 countries across the globe including The USA, UK, Australia, Canada, etc.
- The Indian companies have entered the various categories namely metabolic, respiratory, etc.
- Indian pharmaceutical companies have established a strong sales and distribution network in India as well as across the globe. It enables the customers to get the newer products as early as possible.
- Owing to the awareness of health, there is a demand for quality healthcare products in India as well as abroad.
There are many big guns namely Sun Pharma, Aurobindo Pharma, Lupin are the best bets to start investing in this sector.
Consumer durables industry
Consumer durable products are washing machines, air conditioners, air coolers, refrigerators, wristwatch, cell phones, etc. People buy them when they have enough disposable income to spend. As the economy has developed and still developing and due to the availability of easy loans at an affordable interest rate offered by NBFCs, people buy consumer durables. There was a time when buying a refrigerator, washing machine or AC was a luxury, now a day it has become necessary.
Back in 2000, a land phone in someone’s house was a luxury and matter of status, but now there is a cell phone in everyone’s hand and in some cases, people have smartphones. There are many more consumer durable items that a family possesses. All this has happened due to economic development after the economic policy of 1991 which changed the picture. Whatever, this consumer durables sector has a vast market to grow in India. As India has a large population, this can be a positive aspect of this sector.
Note: This is the few lessons from the book which I discovered from Benjamin Graham’s brilliant book ‘Security Analysis: Sixth Edition, Foreword by Warren Buffett‘.
The Key Points to consider are as follows,
- The disposable income is rising year on year basis. People have easy access to receive an EMI option by the NBFCs at easy and affordable interest rates. All these factors have driven the demands of the products which boost the sector.
- The sector has a huge untapped market irrespective of rural and urban areas for appliances like air conditioner, cooler, washing machine, and refrigerator. Indians use the above-motioned items only 4% against the world average of 31%.
- The smart city project leads to the demand for the products of the segment.
- Government initiatives towards rural electrification program will move the demand upward for the products in this sector.
- The government of India takes initiative towards doubling farmers’ income by 2022.
- People replace the above-said products earlier to 7 years in comparison to 12 years.
- Lower labor costs, large consumer market will lead to setting up manufacturing units in India which will result in lesser imports. This will enable consumer durables to reduce the price which will lead to more selling of the above products increasing sales, revenue, and profit margin.
Titan Company, Symphony, Voltas, Blue star, etc. are the well-known brands of the Consumer Durables sector.
In the modern world of liberalization, a country has to receive services or buy products from a different country. This increases the business of the service sector. The service sector is the major source of revenue in India. In this sector, many people are employed after agriculture. After the economic reforms, the service sector is rapidly emerging. It contributes 66 percent of the Indian GDP. The government is trying hard to widen the service sector and reach the world market. India exports various services and products to foreign countries. So, the service sector is getting its business. The following points can be considered for the service sector.
- India exports software to various countries. India has become a medical destination for the world due to the cheap rate and good service quality.
- The large skilled manpower, increase in efficiency, lower response time and the government initiatives to remove trade barriers in the service sector i.e. information technologies and other allied sectors have made India the hot destination in respect of foreign direct investment.
- The government has initiated the policy of Privatisation to reduce the burden and is working for sustainable industrial growth. The direct beneficiary will be the service sector.
Titan Company, Symphony, Voltas, Blue star, etc. are the well-known brands of the Consumer Durables sector.
With the economic progression in India, the per capita income as well as disposable income and financial awareness of the people have increased. The untapped market has been opened for the insurance companies. On the wings of financial awareness and the various financial products like term plan, money-back policies, health insurance, car insurance, etc. the insurance sector is now the most emerging sector for the future for investment purpose. The key points to consider are as follows.
- The Indian economy is growing and the disposable income of the people is increasing accordingly. So, people are showing a tendency to have an insurance scheme of any kind i.e. car insurance, health insurance, term plan or money back policy, etc.
- In India, only around 5% of people have an insurance cover. From this fact it can be concluded that India has a huge untapped market for existing companies.
- The insurance companies offer several insurance products in accordance with age, job profile, income status, etc. of the policyholder.
- It has a strong entry barrier i.e. huge Capital requirement, FDI investment is capped at 26%, License requirement, stringent government regulations, the brand equity of the existing companies.
HDFC Life, ICICI Lombard, SBI Life, etc. are the well-known brands of the Insurance sector.
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If you have any questions regarding which are the best sectors to invest in India for the long term feel free to comment so that we have a discussion. If you found this post helpful don’t forget to share this post.