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Last Updated : May 02, 2020 01:30 PM IST | Source: Moneycontrol.com

Auto index up 30% from lows in a month; Buy on Maruti, Escorts & Minda: Vinod Nair

The auto index has given a return of 30 percent in the last 1 month from its low due to the expectation that the government’s stimulus package on the economy will benefit the industry & sales will improve in Q2.


The auto index has given a return of 30 percent in the last 1 month from its low due to the expectation that the government’s stimulus package on the economy will benefit the industry & sales will improve in Q2, Vinod Nair, Head of Research at Geojit Financial Services, said in an interview with Moneycontrol’s Kshitij Anand.

Q) A strong day to end the week! The Sensex is back above 33000 while Nifty50 reclaimed 9800. What is fuelling market rally on D-Street?

A) Push in global liquidity, the expectation of a bonanza stimulus in India, developments on the treatment, and supportive chart parameters are the main reasons for the momentum while economic fundamentals continue to be dim.

Optimism has also developed that the economy will open in a phase-wise manner, given the reduction in the rate of virus spread.

Q) As we close the month of April on a positive note after a massacre in March – how is May likely to pan out for investors. There is a very popular Wall Street adage ‘Sell in May and Go Away’? Do you think we could hold onto gains if not why?

A) At the current level, we have a cautious view on the market, unless the global health environment improves with better treatment and vaccination in the future.

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We term this as a bear rally, the sustainability of which is difficult in the short-term given rising cascading economy effect.

We are advising traders to capitalise on this rally and book gains in the near-term. Long-term investors can accumulate on dips.

Q) What is your call on banking and auto stocks that have run up quite sharply in the week gone by?

A) Banking stocks are under the assistance of supportive measures by RBI & the government to support the economy. The highest concern is on SME, MSME, and continuity of business in the near to medium-term.

Even though a good amount of weak credit growth and higher provisions during Q1 and Q2 is factored in price, we remain cautious due to asset quality concern & downgrade in outlook.

Having said that private banks' premium valuations have beaten down, presenting an opportunity for long-term investors. Banks having exposure in the retail segment with a good branch presence, better loan mix, and comfortable balance sheets like HDFC Bank, ICICI Bank, and SBI will stand out.

In the auto sector, the stocks that have lower debt and a rich balance-sheet are expected to outperform in the auto segment, post-COVID-19.

The auto index has given a return of 30 percent in the last 1 month from its low due to the expectation that the government’s stimulus package on the economy will benefit the industry & sales will improve in Q2.

However, improvement in demand and change in consumer spending might have a longer impact on the sector. Currently, the index is trading at 18x on a 1-year fwd basis which is 13 percent premium to its five-year historical average at 16x.

We have a cautious view in the short-term with a selective Buy rating on Maruti Suzuki, Escorts, and Minda Industries Ltd.

Q) What are the important factors which investors could track in the coming week, and in the month of May which could dictate the trend for markets?

A) A large portion of Indian company results is likely to be released in the month of May with a negative bias. Possibility of opening the economy, the size & effectiveness of the fiscal stimulus to be announced will define the trend of the domestic market in the near-term.

While globally, the grim economic data, news regarding treatment, and vaccination are the watchlist.

Q) What is your view on Tech Mahindra and HUL which came out with results on Thursday? What should investors do – buy, sell, or hold?

A) Tech Mahindra posted weak results as profit fell by 29 percent on a YoY basis to Rs 803 cr. The EBIT margin is a big miss and came at 10 percent.

Telecom is a very important business mix for the company which has a positive outlook due to higher consumer spending in telecom & data.

We believe that the entire IT space will go through transformation post-COVID pandemic and with respect to Tech Mahindra, as most companies have delayed their 5G CAPEX that could impact the telecom revenue for the stock. We are downgrading forecast and outlook on the stock.

COVID-19 has impacted HUL in terms of demand and supply but comparing to other stocks and sectors the outlook has not deteriorated much.

On the demand side, already subdued rural demand could further impact by lower-income with the weaker sale of crops amid labor and supply chain issues.

But, monsoon will play a vital role in demand. As the economy improves, we expect V-shape recovery and have a HOLD rating.

The company plants are running at 70-75 percent of the capacity and is expected to be among the best performing stock in the near to medium term given the cautious trend of the market.

Q) What are your view on RIL results and Rights issue and what should investors do? Do you see a positive/negative reaction on Monday?

A) The medium to long term outlook of RIL has significantly improved on account of its plan to consolidate its key assets which will create value to shareholders through strategic development, equity infusion, and deleveraging of balance sheet.

The proposed right issue (Rs 53,000 crore) is a step in that direction. The total amount of proceeds is likely to be about Rs 1,04,000 crore (Rights, Facebook & BP), excluding transactions with Aramco & Financial investor.

Going ahead, there will be challenges in cyclical business that would be offset by digital & retail business. However, in the near term, weak oil prices are likely to impact its cash cow (refining and petro-chemicals business), dilution in equity, high leverage, and uncertainty in business post-COVID, which will impact the performance of the stock in the near to medium-term.

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.
First Published on May 2, 2020 01:12 pm
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