The unprecedented disruption caused by COVID-19 may have a longer-than-expected impact on the economy and could change the leadership in the stock market, say experts.
While the banks and NBFCs have been dominating the benchmark indices, market experts says emerging sectors such as pharma are gearing up to take the front seat.
Sanjiv Bhasin, Director at IIFL Securities, said the market would see a change in sectoral leadership after the COVID-19 and the leaders of now may not be in the same position in the future.
"OTT and data is the next game plan. There will be a lot of new changes which will come about. There will be a change in market leadership also. New leaders may not be from NBFCs but from some other sectors such as pharma," he said.
Vinod Nair, Head of Research at Geojit Financial Services, too, has a similar view.
"The implication to varied businesses will differ within which some will evolve as a winner as a result of the change in public preference and investment strategy post-COVID issue," Nair said.
The key beneficiaries, he said, would be those with stable businesses and outlooks such as staples, agriculture, FMCGs, healthcare, pharma, chemicals and E-commerce. Hospitality, restaurants, travelling and transportation, oil & gas and metals would be the underdogs, he said.
Banks, NBFCs and service providers may be neutral in which strong brands will dominate, Nair said, adding that pharma would have an edge in the medium-term due to heightened healthcare requirement and policy.
PSUs cannot be considered positively in a blanket, given the weak fiscal position of the government and the fall in demand, Nair said.
Vikas Jain, Senior Research Analyst, Reliance Securities, is of the view that private banks, pharma and insurance sectors will dominate the markets in the coming years as valuations are reasonable and market share gains in domestic and international markets will incrementally add earnings expanding the PE multiples going forward.
While it cannot be said precisely how the things will pan out after normalcy returns, analysts say investors should add quality stocks to their portfolio, as the market will see a V-shape recovery after the coronavirus infections comes under control.
Here are 10 long-term recommendations from various sectors that may be your best bets in these uncertaint times:
Analyst: Vinod Nair, Head of Research at Geojit Financial Services
Asian Paints | Buy | LTP: Rs 1,718.25 | Target price: 1,884
Asian Paints has mostly domestic-oriented business and has displayed resilience by giving double-digit volume growth despite challenging environment.
Tailwinds on raw material cost due to sharp fall in crude oil prices will aid significant expansion in gross margins.
The analyst say the impact of COVID-19 on demand can be mitigated by lower raw material prices.
The stock is trading near a P/E of 45 times, which is at a discount of 7 percent to average three-year forward P/E.
"We expect earnings to grow at a CAGR of 23 percent over FY19-22E due to strong operating margin and lower tax rate. Strong balance sheet and debt free status will support premium valuation. Considering the long term positive industrial outlook we revise our rating to buy and value the stock at 44 times FY22 EPS, with a target price of Rs 1,884," said the analyst.
Pidilite Industries | Buy | LTP: Rs 1,478 | Target price: 1,560
The recent reduction in oil prices will enable the company to lower costs and improve margins in the future.
Pidilite's large market share in the adhesive sector along with its strong financials will help the company withstand the COVID-19 impact.
The company is trading at a PE close to its five-year average.
TCS | Buy | LTP: Rs 1,735 | Target price: Rs 2,084
Ongoing virus concerns seem to have hurt TCS onsite works, which is evident in the price correction.
Organizations across the globe will consider going digital post COVID-19, which is expected to boost revenue in the long term.
India’s largest software exporter specially recognized for the strength of its corporate governance.
The company has zero debt and enough cash to provide cash dividends as well as buybacks on a consistent basis in the future.
"We have a buy rating on the stock with a target price of Rs 2,084 based on 19 times FY22E EPS," said the analyst.
Britannia Industries | Buy | LTP: Rs 2,847.90 | Target price: Rs 3,455
The packaged food industry is facing supply chain issues rather than demand issues due to the lockdown.
Once the situation stabilises, the analyst believes Britannia would be one of the major beneficiaries considering the factors such as essential food category products, negligible dependence on exports (nearly 6 percent), strong distribution network (nearly 55 lakhs outlets including nearly 21.7 direct), negligible debt (D/E of 0.04 times) and good cash position (nearly Rs 850 crore as on FY19) and strong return ratios (RoE of 24 percent and RoCE of 29 percent as on FY19).
"The stock is currently trading at one year Fwd P/E of nearly 37 times which is nearly 23 percent discount to its last 5 year average. We value the stock at 46 times FY22E P/E (at five year average) and upgrade to buy considering the recent sharp drop in stock price with a target of Rs 3,455," said the analyst.
Analyst: Vikas Jain, Senior Research Analyst at Reliance Securities
ACC | Buy | LTP: Rs 1,137 | Target price: Rs 1,350
One of the largest cement companies, trading at 50 percent discount to the five-year average to its earnings multiple and EV/EBITDA, higher cash in its balance sheet also would aid higher dividends.
Volumes have been impacted due to the lockdown but once the recovery starts, demand will increase keeping the pace of cement price hikes and lower energy costs would in turn support margin improvement, said the analyst.
Biocon | Buy | LTP: Rs 337 | Target price: Rs 470
Biocon is an innovation-led company and has developed and commercialised a differentiated portfolio of novel biologics, biosimilars, and complex small molecule APIs in India and several key global markets, as well as, generic formulations in the US and Europe.
"It is one of the consistent outperformer in the pharma space and we believe it will continue to outperform as new revenue streams, subsidiary companies innovations would drive growth in earnings and continue to enjoy superior valuations," said the analyst.
HDFC Bank | Buy | LTP: Rs 865.15 | Target price: Rs 1,200
One of the best stocks to own in the financials, well positioned to deliver strong business momentum with advances growth of 20 percent, consistent margin of 4 percent and impeccable asset quality to aid return ratios.
Unlocking of its subsidiaries listing will also add value. The stock trades at 2.4 times FY21E adjusted book value, recent correction in price is providing comfort as trades at 30 percent discount to its 10 year average.
HDFC Life Insurance Company | Buy | LTP: Rs 471 | Target price: Rs 650
As per the analyst, the growth prospectus for HDFC Life remain strong on the back of strong product positioning, increasing retail credit by the banks provides opportunity for further penetration of insurance and higher glaring protection gap of over 92 percent.
Strong trend in financial inclusion of household savings and visibly improving persistency trends are also th positives for the stock.
"One of the strong outperformers of 2019 and will continue to deliver consistent growth in earnings and valuations," the analyst said.
Infosys | Buy | LTP: Rs 640 | Target price: Rs 800
Infosys is one of the first multibagger stocks in India’s capital market with consistent wealth creation at regular intervals of time. Recent price correction offers a discount to its long-term averages.
The pandemic has affected the new deals, as industries such as travel, retail and offshore operations are affected but once the business continuity mode is on, it would win new deals and contracts.
Reduced travel costs and currency deprecations should aid margins in coming quarters.
Brokerage: ICICI Securities
Hindalco Industries | Buy | LTP: Rs 115.50 | Target price: 199
Novelis has completed Aleris acquisition for $2.8 billion, which is nearly $200 million more than the earlier announced $2.58 billion price tag.
The increase is on account of an additional payment of $50 million due to better-than-expected performance of Aleris over TTM.
The rest is on account of the additional working capital debt assumed in Aleris to support ramped-up operations. While acquiring all the 13 plants of Aleris, to satisfy regulatory requirements, Novelis will have to divest Lewisport (Kentucky, US) and Duffel (Belgium) as announced earlier.
"Adjusted for the divestitures (announced for Duffel and estimated for Lewisport), we estimate the residual Aleris value at about $1.7bn-1.8bn and corresponding EBITDA at $200mn-250mn (without factoring-in any synergy benefits). The eventual acquisition multiple is 7.5-8 times EV/EBITDA," said the brokerage.
The timing of completion of the acquisition is undoubtedly adverse, said the brokerage and added that the residual valuations (post Duffel and Lewisport divestitures), can at best be termed neutral. Yet, at current valuations, large part of the acquisition negatives are built-in.
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