The fatal second wave of coronavirus is ravaging the country. But unlike last year’s wave, domestic stock markets have held up this time around. After rising in February and March, the Sensex fell only 1.5% last month, amid extreme panic. The reasons – hope that vaccination will accelerate over the next few months, optimism about growth in corporate profits and expectations that the government and the central bank will adopt expansionary policies if the economy hits. to serious problems like last year. The benchmark index has produced a return of 1.7% year-to-date (YTD).
“The market has discounted a sharp rise in cases. A further peak in the coming days cannot be ruled out. The market takes into account that second wave cases will peak by the end of May or mid-June. However, the availability of jabs at private hospitals and the acceleration of vaccination will be key factors driving the market, ”says Lav Chaturvedi, ED and CEO of Reliance Securities.
Conversely, if infections spread, markets can collapse. “The current consensus is that the second wave effect is about to peak. But if it does spread, the economic fallout will be larger than expected, leading to further deterioration in GDP growth and corporate earnings. companies, which has not been captured by the market, ”says Vinod Nair, head of research at LKP Securities.
Thus, while on the one hand, the markets fear the disruptions linked to Covid, the impact on GDP, the quality of assets, corporate profits and the budgetary health of governments, if the situation is under control, the resumption of economic activities can be quite brutal. Apart from that, inflation and interest rates will also boost the stock markets. The spread and intensity of the upcoming monsoon in India will also be closely watched, said Deepak Jasani, head of retail research at HDFC Securities. Amidst all of these uncertainties, market experts are bullish on several sectors.
HE: The information technology (IT) index was among the best performers of the previous year. It produced over 100 percent returns against a 68 percent increase in the overall index. It is up 8 percent this calendar year and is currently trading below its 52 week high. “IT stocks have corrected from their 52 week highs. As a result, you can add quality IT stocks to your portfolio over the long term, ”says Gaurav Garg, head of research at CapitalVia Global Research. In addition, half of the stocks in the index have outperformed the index with cumulative returns of up to 345 percent and are expected to advance with strong momentum. Most IT companies reported big hits in the fourth quarter and expect revenue momentum to continue with double-digit growth. IT majors Infosys and Wipro recorded revenue growth of 13.1% and 3.4%, respectively, in the fourth quarter of fiscal year21 on an annual basis. While Infosys has set its revenue growth forecast at 12-14% in constant currency, Wipro expects IT services revenue to grow 2-4% sequentially in the June 2021 quarter.
Pharma / Health: The pandemic drew investors’ attention to this defensive sector last year, with a return of 76%. Now, with the second crushing wave, the growing clamor to build quality healthcare infrastructure has put the spotlight on this segment. Investors can choose large-cap pharmaceutical counters where the volatility is higher, Garg says. “It may not be a smart move to buy frontline index stocks right now. Many pharmaceutical stocks have given rise to multi-year breakouts which, in turn, can propel them into new ones. summits as the Covid-19 situation worsens, “he adds. .
The sector’s financial performance has been commendable – 19 companies that reported March quarter results posted growth of 11.4% in total revenue and 25% in profits from 7% and 22%, respectively, in March. 20 quart. In addition, the outlook for formulations, APIs and contract manufacturing for developed and emerging markets remains strong. “We expect the reassessment to continue for companies with differentiated business models (Sun Phama and Divis), a robust ANDA pipeline (Aurobindo Pharma or Lupine) and senior executors (Laurus). . Reddy, Aurobindo Pharma and Strides Pharma, ”states a recent report from Motilal Oswal.
Infrastructure: The government’s massive infrastructure development plans bode well for the sector. However, partial lockdowns in many states can pose an execution risk and hurt the short-term performance of companies in the industry. The infrastructure index fell 1.3% in April; it is up 18.4 percent year-to-date. Chaturvedi of Reliance Securities says it is best to bet on sectors that could benefit from a pickup in capital spending and so infrastructure, cement, some automobiles and industries may be favored from a long-term perspective. “While the government’s budget spending plan could be affected due to the second wave of Covid-19, it cannot compromise its capital spending program in order to support economic activity,” he says.
A Motilal Oswal report awaits opportunities for all players in the sector. So far, companies in this segment have recorded a 31 percent growth in net sales and a 94 percent increase in net profits in the fourth quarter of fiscal 21.
Metals: The BSE Metal index was the best performing index of the last financial year with a return of 151.2%. In the past month, national steel stocks have returned 35 percent. “Given the lower cost of iron ore in India, we expect the profitability of domestic ferrous companies to improve further, which is already evident in their better RoE potential.” In our opinion, national iron companies have an advantage with no threat of imports and a profitable export market, ”says a report from Edelweiss Research. This is especially true in the case of SAIL, whose RoE is expected to improve significantly given its fully captive iron ore and higher volumes. For JSW Steel, RoE is expected to improve significantly with the commissioning of the 5 mtpa Dolvi plant, the report adds.
Auto: The auto index fell 2.8% in April as partial lockdowns impacted domestic sales. Shares of Maruti Suzuki and Hero MotoCorp fell 6% and 3% respectively during the month. On the financial side, while Maruti and Hero Motocorp posted revenue growth of over 30% in the last quarter of FY21, their profitability was affected. Now, with Covid restrictions and voluntary plant closures by original equipment manufacturers, volume recovery could be affected, although the sale of passenger vehicles and tractors would find support through kharif seedlings and the bumper crop of rabi.
Analysts are wary of certain sectors. Retail, hospitality and aviation will take some time to recover from the effect of Covid, says Jasani of HDFC Securities. These sectors had shown a strong recovery from the ebb of the first wave with business reaching nearly 70 percent of pre-Covid levels, but the second wave dented their prospects.
Real estate is another area where we could see some uncertainty due to partial lockdowns, according to Garg of CapitalVia Global Research. Chaturvedi of Reliance Securities says the asset quality of banks and NBFCs with significant exposure to MSMEs, MFIs and unsecured loans could once again fall into a cloud. The BSE Bankex corrected 12.3 percent from the high, topping the 7.3 percent drop in the Sensex. Large-cap bank stocks, including HDFC Bank and ICICI Bank, with more diversified income streams corrected 10-14% from their 52-week highs, while lenders such as Bandhan, IndusInd and AU Small Finance, are more exposed to business loans. , utility vehicle loans, property loans and microfinance loans, are down 18 to 30 percent. Likewise, Mahindra & Mahindra Financial Services and L&T Finance Holdings – with a relatively higher share of vulnerable loans – fell by more than 25 percent. A report from Emkay Research estimates that for large banks such as ICICI, Axis, Kotak Mahindra, HDFC and SBI, achieving adjusted book value (ABV) will be a near non-event (
With the long-term economic outlook looking good, all sectors should win. But now is the right time to have a balanced portfolio of new economy and old economy sectors, as both should benefit, says Nair of LKP Securities. “In the short term, a few sectors like Financials could underperform due to the issue of NPA and FMCG / consumer goods due to high valuations,” he adds.
But growth opportunities will remain intact in sectors with good long-term prospects due to increased public spending and economic recovery.