The fatal second wave of coronavirus is ravaging the nation. But unlike in last year's wave, domestic stock markets have been resilient this time. After rising in February and March, the Sensex fell just 1.5 per cent last month, amid extreme panic. The reasons -hope that immunisation will pick up pace over the next few months, optimism about corporate earnings growth and expectations that government and the central bank will come out with expansionary policies if the economy gets into serious trouble like last year. The benchmark index has delivered a 1.7 per cent return year-to date (YTD).
"The market has discounted a sharp rise in cases. A further spike in coming days cannot be ruled out. The market is factoring in that cases under the second wave will peak by May-end or mid-June. However, availability of jabs at private hospitals and faster ramp-up of vaccination will be key factors that will drive the market," says Lav Chaturvedi, ED & CEO, Reliance Securities.
Conversely, if infections spread, markets can tank. "The current consensus is that the second wave effect is about to peak. But if it spreads, the economic fallout will be higher than anticipated, leading to further downgrade of GDP & corporate earnings growth, which has not been factored in by the market," says Vinod Nair, Head of Research at LKP Securities.
So, while on one hand, markets fear Covid-related disruptions, impact on GDP, asset quality, corporate earnings and fiscal health of governments, if the situation comes under control, resumption of economic activities can be quite sharp. Apart from these, inflation and interest rates will also drive stock markets. Spread and intensity of the forthcoming monsoon in India will also be keenly watched, says Deepak Jasani, Head of Retail Research, HDFC Securities. Amid all these uncertainties, market experts are bullish on quite a few sectors.
IT: The information technology (IT) index was among the best performers last fiscal. It delivered over 100 per cent returns as against a 68 per cent rise in the headline index. It has risen 8 per cent this calendar year and is currently trading below its 52-week high. "IT stocks have corrected from their 52-week highs. Therefore, one can add quality IT stocks in his/her portfolio for the long term," says Gaurav Garg, Head of Research at CapitalVia Global Research. Moreover, half the stocks in the index have outperformed the index with YTD returns of up to 345 per cent and are expected to move ahead with strong momentum. Most IT companies have reported big deal wins in the fourth quarter and expect revenue buoyancy to continue this fiscal with double-digit growth. IT majors Infosys and Wipro reported 13.1 per cent and 3.4 per cent top line growth, respectively, in Q4FY21 on a year-on-year basis. While Infosys has pegged revenue growth guidance at 12-14 per cent in constant currency, Wipro expects revenue from IT services to grow 2-4 per cent sequentially in the June 2021 quarter.
Pharma/Healthcare: The pandemic drew investors' attention to this defensive sector last year when it delivered 76 per cent returns. Now, with the overwhelming second wave, the growing clamour to build quality healthcare infrastructure has turned the spotlight back to this segment. Investors can choose large-cap pharma counters where volatility is on the higher side, says Garg. "It might not be a wise decision to buy frontline index stocks at this point in time. Many pharma stocks have given multi-year breakouts which, in turn, can propel them to new highs as the Covid-19 situation worsens," he adds.
The financial performance of the sector has been commendable - 19 companies that have declared their March quarter results have posted 11.4 per cent growth in total income and 25 per cent in profits as against 7 per cent and 22 per cent, respectively, in the March'20 quarter. Further, the outlook for formulations, API and contract manufacturing for developed and emerging markets remains robust. "We expect re-rating to continue for companies with differentiated business models (Sun Phama and Divis), robust ANDA pipeline (Aurobindo Pharma or Lupin) and superior executors (Laurus). Vaccine distribution or manufacturing will provide further upside to Gland Pharma, Dr. Reddy, Aurobindo Pharma and Strides Pharma," says a recent Motilal Oswal report.
Infrastructure: The government's massive infrastructure development plans augur well for the sector. However, partial lockdowns in many states may pose a risk to execution and dent the near-term performance of companies in the sector. The infrastructure index fell 1.3 per cent in April; it is up 18.4 per cent YTD. Chaturvedi of Reliance Securities says it is better to bet on sectors that could be beneficiaries of revival in capital expenditure and so infrastructure, cement, select auto and industrials can be preferred from the long-term perspective. "While government's budgetary expenditure plan might get hit due to the second wave of Covid-19, it may not compromise on its capital expenditure programme in order to sustain economic activity," he says.
A Motilal Oswal report expects opportunities for all players in the sector. So far, the companies in this segment have reported 31 per cent growth in net sales and 94 per cent rise in net profits in Q4FY21.
Metals: The BSE Metal index was the best performing index last fiscal with 151.2 per cent returns. Over the past one month, domestic steel stocks have returned 35 per cent. "Given the lower cost of iron ore in India, we expect profitability of domestic ferrous companies to improve more, which is already evident in their better RoE potential. In our view, domestic ferrous companies are at an advantage with no threat from imports and a remunerative exports market," says an Edelweiss Research report. This is particularly true in 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 substantially owing to commissioning of the 5mtpa Dolvi plant, the report adds.
Auto: The auto index was down 2.8 per cent in April as partial lockdowns impacted domestic sales. Shares of Maruti Suzuki and Hero MotoCorp were down 6 per cent and 3 per cent, respectively, during the month. On the financial front, while both Maruti and Hero Motocorp posted over 30 per cent growth in revenues in last quarter of FY21, their profitability took a hit. Now, with Covid restrictions and voluntary plant shutdowns by original equipment manufacturers, volume recovery could be impacted, though sale of passenger vehicles and tractors would find support from the forthcoming kharif sowing and bumper rabi harvest.
Analysts are wary of some 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 strong recovery after the ebbing of the first wave with business reaching close to 70 per cent of pre-Covid levels but the second wave has dented their prospects.
Garg of CapitalVia Global Research says real estate is another area where we might see some uncertainties due to partial lockdowns. Chaturvedi of Reliance Securities says asset quality of banks and NBFCs with sizeable exposure to MSMEs, MFIs and unsecured loans may again come under a cloud. The BSE Bankex has corrected 12.3 per cent since the peak, outpacing the 7.3 per cent fall in the Sensex. Large-cap banking stocks, including HDFC Bank and ICICI Bank, with more diversified revenue streams have corrected 10-14 per cent from their 52-week highs, while lenders such as Bandhan, IndusInd and AU Small Finance, with higher exposure to business loans, commercial vehicle loans, loan against property and microfinance loans, are down 18-30 per cent. Similarly, Mahindra & Mahindra Financial Services and L&T Finance Holdings - with relatively higher share of vulnerable loans - have declined over 25 per cent. An Emkay Research report estimates that for large banks such as ICICI, Axis, Kotak Mahindra, HDFC and SBI, the hit to the adjusted book value (ABV) will be a near non-event (
As economic outlook is bright on a long-term basis, all the sectors are expected to gain. But it is a good time to have a balanced portfolio of new economy and old economy sectors as both are expected to benefit, says Nair of LKP Securities. "In the near term, a few sectors like finance may underperform due to NPA issue and FMCG/consumer goods due to high valuations," he adds.
But growth opportunities will remain intact in sectors with good long-term prospects on account of increased government spending and economic recovery.
Copyright©2021 Living Media India Limited. For reprint rights: Syndications Today