The 50 percent rally in benchmark indices in just four months indicated that the market seems to be on a strong footing despite the risk of COVID-19, geo-political tensions and asset quality concerns.
Brokerage houses believe that the ample flow of liquidity, especially after stimulus announced by global central banks to revive their economies, has been a key factor behind this outstanding rally. Recovery in consumption and rural economy and better or in line corporate earnings in June quarter are also supporting the market.
The rally also indicated that most of the negative news with respect to FY21 earnings seems to be already discounted and the market could be looking at FY22 and beyond earnings, experts feel.
"We believe markets are driven by liquidity even as FY21 and FY22 EPS has been cut by 14.4 percent and 12.1 percent respectively. Markets have already discounted a washout FY21 and have started looking beyond FY22. However, the pace of liquidity led rally suggests markets running ahead of fundamentals on hopes of recovery," said Prabhudas Lilladher which cut its 12-month Nifty target by 6 percent to 11,919.
The brokerage now estimates 3 percent decline in Nifty EPS for FY21, 34 percent growth in FY22 and 18 percent growth in FY23 (Auto, Telecom, BFSI and Metals will be key driver of earnings in FY23). "As FY22 will be a year over a COVID-19 base FY23 will be the first year of normal growth."
"Although markets have seen a sharp run-up post the bottom of March 2020, the near term outlook is uncertain. We see little probability of a similar correction in coming months, sans COVID-19 pandemic going out of control," it said.
Harsha Upadhyaya, President & CIO – Equity, Kotak Mahindra Asset Management Company also told Moneycontrol that market seemed to be looking forward to FY22 and beyond, which are expected to be normal years for businesses.
"If we look at the immediate term, definitely the earnings decline is going to be significant. For example, most estimates are pointing to around 40 percent decline in aggregate earnings during the April-June quarter. Even July–September quarter is unlikely to be a normal one," he said.
Prabhudas Lilladher feels although resilient consumer demand and rural upsurge is positive, markets are ignoring the impact of re-imposition of local lockdowns, deterioration in fiscal conditions and purchasing power of large sections of the population.
The rural economy has broadly been unaffected by COVID-19 and was also supported by the normal monsoon expectations this year with strong Rabi season and hope of strong Kharif season as well. As a result, we have seen a strong rally in all sectors which are directly or indirectly linked with the rural economy like tractors, FMCG, two-wheelers etc.
Most of the experts believe that every crisis gives a new opportunity for investment and also new leaders to the market, similar to what we have seen in past like dotcom boom, global financial crisis etc.
Prabhudas Lilladher believes that COVID-19 will change the way people live, spend and enjoy thus changing the psychology of the generation.
"While every major shakeout like this in the past has seen new leaders (the nineties was consumption, followed by dotcom, then infra and then BFSI and consumption), the current rally has same old legs of BFSI and consumption so far. Technology-led by Reliance and Insurance seems to be leading the rally," the brokerage said.
The brokerage has added Hero MotoCorp, Voltas and Lupin Labs to its model portfolio and removed Inox Leisure and VIP Industries besides tinkering with weights. It has also added Indraprastha Gas, Bajaj Electricals and Lupin Labs to its top picks list while removing Kalpataru Power Transmission, IPCA Labs and Cholamandalam Finance.
In its model portfolio, Prabhudas Lilladher has an overweight rating on cement, consumer, healthcare and oil & gas sectors, whereas it is underweight on automobiles, banks, IT, metals and NBFC segments.
In case of banks and NBFC which are generally considered the backbone of the economy, the brokerage believes that the full impact of lockdown and its effects on bank NPA and balance sheets will get reflected in Q2 and Q3 results. "Similarly pressure on consumer purchasing power can impact NBFC's and HFC, although the initial reduction in outstanding during the moratorium period is encouraging."
Among largecaps, its top picks are HDFC Bank, ICICI Bank, Bajaj Finance, Maruti Suzuki, L&T, UltraTech Cement, Britannia Industries, Dr Reddy's Labs, Petronet LNG, Lupin and Indraprastha Gas.
Crompton Greaves Consumer, Kansai Nerolac Paints and Bayer Cropscience are its picks in the midcap space, while in the smallcap space, they like Bajaj Electricals, JK Lakshmi Cement, KNR Constructions and Inox Leisure.
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