FMCG, Pharma, and Agrochemicals are some of the sectors that are essential in nature and should do well given greater revenue visibility, Jyoti Roy, DVP Equity Strategist, Angel Broking Ltd, said in an interview with Moneycontrol’s Kshitij Anand.
Q) July has been an impressive month for investors with both Sensex and Nifty climbing above crucial resistance levels. We saw mild profit booking towards the close of the month, but could momentum change in August?
Nifty rallied by ~27 percent till July-end from its intermediate-term lows in mid-May driven by a recovery in economic activity post unlock 1.0.
While there was a significant improvement in economic activity from May- end till the middle of July, there has been a slowdown in the second half of the month which was reflected in the July manufacturing PMI numbers, which slipped to 46.0 from 47.2 in June.
Slowdown has been largely on account of localized lockdowns by the state Governments which has impacted supply chains along with end demand.
Currently, markets seem to be pricing in normalization of economic activities over the next few quarters despite the recent increase in COVID-19 cases in India.
Therefore, we are likely to witness increased market volatility from here on given recent slowdown in economic activities. The volatility may continue for some time until the markets are not sure about the durability of the recovery.
Q) We have seen some massive outperformance from the IT pack. What is fuelling the rally, and what should investors do?
A) The recent outperformance in IT stocks has been driven by the better than expected Q1 results and positive management commentary regarding demand going forward.
Except for some minor disappointments, most of the companies have posted better than expected set of numbers for the quarter led by Infosys. Other large IT companies like TCS and HCL Tech too have provided positive commentary on demand and growth going forward.
Given improving demand outlook and strong revenue visibility we expect the IT will continue to do outperform the markets in the near term.
However, post the rally we believe that investors will need to be a bit more circumspect and take a bottom-up approach in the sector.
In the large-cap space, HCL Technologies is our top picks given the company’s exposure to the Infrastructure management space which is expected to benefit from greater adoption of the Hybrid cloud.
In the mid-cap space, we like Persistent Systems which is our top picks given attractive valuations and high exposure to the Hi-Tech vertical which is the least impacted due to the Covid-19 outbreak.
Q) Are there any stocks/sectors which investors could include in the portfolio to safeguard themselves from volatility ?
A) Despite the fact that markets have run-up we see value in sectors where there are good growth prospects along with strong revenue visibility.
FMCG, Pharma, and Agrochemicals are some of the sectors which are essential in nature and should do well given greater revenue visibility.
The Telecom sector should benefit from increased data demand given increasing trend of work from home along with improved pricing power. We also expect the IT sector to outperform markets from here on given robust demand and greater demand for digital solutions.
Tractors and Two-wheelers should also benefit from a strong rural economy and pent up demand coming back.
In the agrochemical and chemical space, we prefer Aarti Industries, Galaxy Surfactants, and PI Industries. Britannia Industries and Bharti Airtel are our top picks in the FMCG and telecom space while HCL Tech and Persistent systems are our preferred picks in the IT space.
Coromandel International, Hero MoroCorp, and Swaraj Engines are few of the stocks which will benefit from a resurgence in the rural economy.
Q) 2020 gave an opportunity to investors to build their portfolio at a reasonable price. And many new-age investors seized the opportunity. Early trends indicate that so-called Robinhood investors are buying quality stocks. Which are the factors that one should take care while undergoing value investing?
A) The current market environment is conducive to value investing as there are enough good companies which are trading at a significant discount to their pre-COVID levels valuations.
However, it is important for investors to analyze the long-term prospects of the business before investing in order to avoid falling into a value trap.
Investors should not buy into a stock just because it is cheap on a Price to earnings multiple but should do a thorough analysis of the business.
Given that India will remain a growth market in the long-term one cannot neglect growth stocks for a prolonged period of time.
We, therefore, believe that an Investor’s portfolio should be a mix of both growth and values stocks. Investors can use corrections to buy into high-quality growth stocks as they will generate significant alpha over the long run.
Q) What is your view on the recent results which have come out from India Inc. for the June quarter? They have not been as bad or the commentary from the management seems comforting. Or, was the Street discounting the worst before?
A) While the Q1FY21 numbers have been adversely impacted by the Covid-19 crisis, they have for most parts been in line or ahead of street estimates so far.
Most of the larger IT companies have declared their Q1 numbers which were ahead of street estimates led by Infosys. Few of the larger banks and NBFCs too have declared their Q1 numbers which been mostly in line with street estimates.
We believe that markets were probably factoring in the worst in terms of number and there was a surge in economic activities due to pent up demand post unlock 1.0 which has led to the beat in numbers so far.
However, we are still in the early stages of the recovery phase and it would be prudent to wait for some time before taking a call on the durability of the recovery.
Q) People say history never repeats but rhymes. Leaders of the past might not lead the future. So which according to you could lead the rally on D-Street?
A) Despite the fact that markets have run up we see value in sectors where there are good growth prospects along with strong revenue visibility.
Chemicals, IT, Pharma, Telecom, Two Wheelers, and Tractors are few of the sectors which we believe should outperform the markets from here on.
Q) PM Modi’s assurance to the financial sectors was a positive sign. What is your call on the financials? Do you think investors could contra-bet on this sector as the worst seems to be factored in?
A) Financial stocks have underperformed the markets as they are expected to bear the brunt of the outbreak as the Covid-19 situation is going to result in higher NPA’s over the next 6-12 months.
The Banking and NBFC sector has been amongst the worst-performing sector since the beginning of the COVID – 19 crisis as markets are expecting an increase in NPA’s over the next 6-12 months.
The sector was just coming out of a prolonged NPA cycle and the Covid-19 outbreak will further delay the recovery cycle for the sector.
We expect an increase in NPA’s over the next 2-3 quarters which will push out recovery for the sector by another 2-3 quarters.
The RBI too in its latest financial stability report too have highlighted that they expect GNPA for the banking sector to increase to 12.5% of total advances by the end of FY21 from 8.5 percent in FY20 under their baseline scenario.
Therefore while the banking sector could outperform the Nifty in the near term given beaten down valuations, it will be vulnerable to any risk-off environment.
Therefore one needs to be very selective in the BFSI space and we would recommend sticking to larger banks and financial institutions with high-quality franchises and strong balance sheets as they are expected to come out of the crisis stronger while weaker lenders are expected to fall behind.
Q) What are you factoring in from the RBI for the rest of the year? More easing?
A) We expect another 25-50bps of additional cuts by the RBI given the large output gap in the economy. However, we are more concerned about the lack of transmission so far as the spread between the overnight rate and the 10 year G Sec continues to remain very elevated at ~180 bps.
This is significantly higher than the historical average of ~75 bps given concerns over the fiscal deficit numbers for FY2021.
We believe that the need of the hour is more unconventional measures by the RBI in the form of Operation twist or open market operations in order to bring down the spreads to a more normal level which will help ensure the transmission of rate cuts.
Q) Maruti Suzuki posted a loss for the first time since IPO. What is your call on the auto space? Which sectors according to you can turn out to be a dark horse?
A) Owing to the global pandemic of COVID-19, it was an unprecedented quarter in the Company’s history with a volume decline of 81 percent in Q1FY21.
Revenue from Operations fell by 80 percent YoY while the company reported a net loss for the first time since its IPO as the Company witnessed zero production and sales for a large part of the three-month period, in compliance with the COVID-19-induced lockdown stipulated by the government.
Due to a good amount of pent up demand, we witnessed -1.1% degrowth in July month auto sales number after reporting 0 sales in April, -86% degrowth in May, -54% degrowth in June.
Auto being discretionary in nature will see slow recovery owing to the pandemic given the lowered income levels across the classes and sentiments of consumers.
However, entry-level 2W space witnessing quick recovery due to low ticket size and personal mobility preferences. Tractors should also outperform the broader auto space due to strong rural growth and pent up demand.
Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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