Here are some well-known cyclical stocks in India that tend to perform well during economic growth phases and may decline during slowdowns.
1. HEG Ltd
HEG Ltd is a leading manufacturer of graphite electrodes, essential for electric arc furnace steel production. Its performance is closely tied to the steel industry’s demand cycles. When steel production rises, HEG benefits from increased electrode demand, making it a classic cyclical stock.
2. Graphite India Ltd
Graphite India Ltd is another major producer of graphite electrodes, serving domestic and international steelmakers. Its revenue fluctuates with global steel industry trends and raw material costs, making it highly cyclical. Periods of strong industrial growth typically drive higher earnings for the company.
3. NBCC (India) Ltd
NBCC (India) Ltd is a government-owned construction company involved in project management, real estate, and infrastructure development. Its stock performance is influenced by economic cycles, as infrastructure spending increases during growth phases and slows during downturns, affecting project execution and revenue.
4. Honeywell Automation India Ltd
Honeywell Automation India Ltd provides automation and control solutions to industries such as manufacturing, energy, and infrastructure. Its growth is closely linked to industrial expansion and capital expenditure cycles. When businesses invest in automation during economic upswings, the company benefits from increased demand.
5. Shree Cement Ltd
Shree Cement Ltd is one of India's largest cement manufacturers. The company's performance is tied to construction and real estate cycles. During economic booms, demand for cement surges, boosting profits, whereas slowdowns in infrastructure and housing projects lead to lower revenue.
6. JK Lakshmi Cement Ltd
JK Lakshmi Cement Ltd operates in the cement and construction materials sector, making it highly cyclical. Increased government spending on infrastructure and private construction drives its growth, while economic downturns lead to reduced demand, affecting sales and profitability.
7. Kajaria Ceramics Ltd
Kajaria Ceramics Ltd is India’s largest manufacturer of ceramic and vitrified tiles. The company thrives when real estate and home renovation activities are strong. Economic slowdowns reduce consumer spending on housing improvements, making its stock price sensitive to cyclical trends.
8. The Phoenix Mills Ltd
The Phoenix Mills Ltd specialises in retail-led mixed-use developments, including malls and commercial real estate. It benefits from rising consumer spending and urbanisation. However, economic downturns negatively impact discretionary spending, leading to lower footfall and rental income in its properties.
9. MOIL Ltd
MOIL Ltd is India's largest manganese ore producer, a key raw material for steel production. The company's revenue and profitability fluctuate with steel demand cycles. When steel demand surges, manganese prices rise, boosting MOIL’s earnings, while downturns lead to weaker performance.
10. Maharashtra Seamless Ltd
Maharashtra Seamless Ltd manufactures seamless pipes used in oil & gas, infrastructure, and construction industries. The company's growth depends on industrial expansion and government infrastructure projects. Economic slowdowns can lead to lower orders, making it a cyclical stock influenced by broader economic conditions.
How cyclical stocks work?
Cyclical stocks thrive during economic expansions and struggle during recessions. For example, demand for electronics surges during economic booms as consumers have more disposable income. However, during downturns, demand declines as consumers postpone major purchases.
Cyclical companies, therefore, experience greater earnings volatility compared to non-cyclical companies, which operate in industries less sensitive to economic cycles.
While cyclical stocks offer the potential for significant returns if economic cycles can be accurately predicted, they also carry higher risk. It's crucial to assess your risk tolerance before investing in these stocks.
Features of cyclical stocks
Here are the features of cyclical stocks-
1. Stock prices follow a trend
These stocks fly on the wings of prosperity during economic growth. On the other hand, they reflect a downward swing in economic slowdowns, reflecting the general pessimism in the market.
2. High beta
Beta is a useful indicator for investors to determine the degree of risk associated with a certain stock in comparison to the overall market. It enables investors to understand how much a stock's price may move in reaction to market conditions. Cyclical equities have a high beta, which increases their vulnerability to market fluctuations.
3. Volatile earnings
Cyclical shares see earnings that fluctuate in tandem with the state of the economy — rising more during market upswings but falling further during downturns.
4. Low price-to-earnings
Investing in cyclical firms yields lower price-to-earnings ratios than non-cyclical equities. Their appealing nature is offset by market downturns when investors avoid long-term obligations and their PE multiples decline.
When should you invest in cyclical stocks
Investing in cyclical stocks needs careful timing. The best time to buy these equities is in the early stages of an economic upturn. This is when businesses in cyclical sectors often start to succeed, paving the way for possible stock price increases. One has to be on the lookout for indications of an economic recovery to capitalise on the success wave. For example, higher government spending on infrastructure projects might indicate economic growth.
Factors to consider before investing in cyclical stocks
- Company's fundamentals: Evaluate the company's cash flow, debt levels, profit margins, and revenue growth. Resilience during economic downturns is ensured by a solid foundation.
- PE ratio comparison: Evaluate the company's PE ratio in relation to industry norms and peers. Even if a cheap PE might appear appealing, it's important to be aware of the underlying risk factors.
- Interest rate impact: Think about the current landscape of interest rates. Since low or declining interest rates encourage economic expansion, cyclical companies do well during these times.
- Economic indicators: Pay attention to changes in consumer spending trends, business capital investment, and government policy. These metrics provide information about the economic cycle's stage as well as prospective investment possibilities.
- Market timing: Choosing the right moment to invest in cyclical stocks is essential. Try to get into the market in the earliest phases of economic growth and get out before a bust. But be prepared to adjust when the market conditions change.
Who should invest in cyclical stocks
These stocks might be the key to realising your financial goals if you have the resilience to withstand market turbulence and the foresight to recognise economic trends. In other words, a high-risk appetite and strong research and analytical skills become prerequisites. But proceed with caution, as this can be a risky excursion.
Advantages and disadvantages of cyclical stocks
Here are the advantages and disadvantages of cyclical stocks
Advantages:
- High return potential: During times of economic expansion, cyclical stocks have a chance for substantial profits.
- Clear identification: Because they are part of sectors that depend on discretionary expenditure, cyclical equities are simple to identify.
- Liquidity: Because cyclical equities are popular, they often have high liquidity, making it simple for investors to acquire and sell shares.
Disadvantages:
- High risk: Compared to non-cyclical equities, cyclical stocks are more risky due to their inherent volatility.
- Uncertainty: Stock prices can fluctuate depending on several factors, including market movements and customer sentiment.
- Market timing dependency: During recessions, poorly timed investments can lead to significant losses or lost opportunities.
Cyclical vs. Non-cyclical stocks
Here are the main differences between cyclical and non-cyclical stocks-
Point of difference
|
Cyclical stocks
|
Non-cyclical stocks
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Product offering
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Discretionary goods and services for consumers. For instance, phones, computers, air travel, and hotel expenses
|
Necessities. For example, water, electricity, and basic food commodities like wheat, rice, and salt
|
Industries
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Hospitality, electronics, automobiles
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Power, pharmaceuticals, utilities
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Return
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High return in an expanding economy
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Consistent return across all phases of economic expansion
|
Risk
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High risk because of how the recession affects them
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Lower risk in comparison to cyclical stocks
|
Conclusion
Cyclical equities provide opportunities to profit as the economy grows. However, they also carry risks. As an informed investor, you should look long-term and be prepared to deal with ups and downs. Diversify your investments to ensure safety.
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