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Here's an easy one. Guess which of the Bombay Stock Exchange's sectoral indices recorded the maximum gain in 2003? If your answer is banking, petroleum, information technology or even the booming pharmaceutical sector, you are way off the mark. The answer, surprisingly enough, is the BSE Capital Goods Index, which outperformed all others by a huge margin of 152 per cent. The next best perfomer was the BSE PSU index with a gain of 115 per cent, followed by the BSE Healthcare Index with 99.81 per cent and only then the BSE it Index, which made a measly 15 per cent gain.

So what heralded the triumphant return of the capital goods industry and hence also of those in the core sector, given up for dead barely two years ago (2001-02)? Or more specifically, what prompted the return of the old economy stock-steel, cement, shipping, power, mining and metals, oil and gas, construction-and made them the stockmarket darling?

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Demand-driven Growth

Stock prices in this sector have moved up because of a number of factors, including reforms in the power sector (the passage of the Electricity Act of 2003 is one such example), the recent upsurge in industrial production (mainly due to government's investment in road-building and other infrastructure projects), and the steady decline in interest rates, contends Surjit S. Bhalla, Managing Director, Oxus Research and Investments, a New-Delhi based emerging market advisory.

According to Sanjiv Goenka, Vice Chairman of RPG Enterprises, which controls CESC, Kolkata's only power distributor, the answer is fundamental. "Markets respond to growth, growth responds to demand, and the core sector is where the demand is,'' he says. The current surge, which Goenka believes is a demand-led growth, is a function of all that the government has done in the field over the last few years.

But that's just one part of the story. The other part has to do with industry's own maturing over the years. Over the last decade, but more significantly beginning 1997-98, many of the weaker companies have either closed or merged with stronger rivals. The others have had to cut costs through layoffs, sell off unviable plant and machinery and improve efficiencies to become more competitive. Sooner or later, the results (greater productivity resulting in higher sales and profits) had to show up on the balancesheet. The surge that the core sector companies have witnessed over the last two years is largely due to that.

However, the turnaround story in the ferrous sector came from the long-beleaguered steel industry, which has seen its profits swell because of robust demand both in India and abroad. For instance, domestic steel consumption has jumped from 4 per cent of the GDP last year to 7 per cent this year. The biggest gainers were Steel Authority of India Limited (sail) and Tata Steel. Incidentally, sail entered the profit zone after nearly five years of continuous losses, recording a profit of Rs 242 crore in the last quarter of the fiscal 2002-03 (it still ended the fiscal with a loss of Rs 304 crore). However, the first three quarters of this fiscal (2003-04), the company registered a profit of Rs 1,498 crore. And its stock has more than quadrupled to Rs 35 in just seven months. But can sail, or for that matter Tata Steel, sustain the turnaround? "With India slated to grow at 7-8 per cent over the next couple of years, there will be continued demand for cement and steel," says V.K. Jain, Chairman, sail. Besides, sail-and more so Tata Steel-have shored up their own efficiencies significantly in recent years.

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Then there are the other obvious chartbusters in the oil and gas segment such as Oil and Natural Gas Corporation, Reliance Industries, Bharat Petroleum, and Indian Oil, which have created huge wealth flows because of deregulation of pricing, better refining margins and some amount of restructuring. "We not only restructured ourselves, but changed the way we work by designing new businesses and new strategy and getting the right people to head each new initiative," says Sarthak Behuria, Chairman and Managing Director, BPCL.

That's someting the non-ferrous metals brigade is citing too in support of its big gains in this year's wealth creators list. For example, Tarun Jain, Director (Finance), Sterlite Industries, says that although high international prices have helped, a major chunk of the profitability has come due to "better product mix, increased productivity and reduced operating costs." As for global prices, he expects them to remain firm for the next three to four years. Reason? "High demand in China, and a lack of investment in new mining projects," answers Jain.

SHIPPING CORPORATION OF INDIA: Rise in market demand coupled with sustained cost-cutting have buoyed the shipping behemoth's fortunes

That global economy is in better health is something the shipping companies will attest too. According to P.K. Srivastava, Managing Director of Shipping Corporation of India, which carries 60 per cent of the country's oil cargo, "unprecedented increase in market demand and substantial cost reduction" have helped the public sector company report a near doubling of net profits in the third quarter of 2003-04 over the same period the previous year. However, GE Shipping's Bharat Sheth says that it is hard to predict how long the freight boom will last. "But seeing the strong demand coming out of Asia, the dry bulk rates may stay strong through 2004," says Sheth.

So is the return of the Old Economy for real? Rather difficult to predict, but assuming that the Indian economy continues to grow at 6-7 per cent in the next couple of years and there is a continued thrust on infrastructure, then cement, steel, and power companies will have little to despair. Maybe being Old Economy isn't so bad after all.
-additional reporting by Arnab Mitra, Swati Prasad, Shilpa Nayak and Moinak Mitra