Overall, we expect the quarterly results to be subdued to average in the sectors which continue to be impacted in terms of financials.
Widespread investor awareness and higher risk propensity has resulted in strong retail participation in direct equities, including IPOs. Another reason for the current flurry of IPOs could be that, Life Insurance Corporation of India, which was supposed to come up with its IPO and put pressure on secondary market liquidity, isn't ready yet, Gopal Kavalireddi, Head of Research at FYERS said in an interview to Moneycontrol's Sunil Shankar Matkar.
Q: After 10 IPOs in three months, do you think the primary market activity could slow down for couple of months?
Initial Public Offerings (IPOs) witnessed renewed interest from retail as well as other investors owing to a variety of reasons. Since the onset of the coronavirus pandemic and vicious stock market correction in March 2020, volatility has trended down and attracted many new investors.
Close to 6 million demat accounts were opened in the last 9 months, taking the retail tally to 44.6 million accounts. During this phase, strong leadership and niche businesses, whose peers continue to enjoy good valuations, decided to take advantage of the prevailing environment and tap into primary markets.
Widespread investor awareness and higher risk propensity has resulted in strong retail participation in direct equities, including IPOs. Another reason for the current flurry of IPOs could be that, Life Insurance Corporation of India, which was supposed to come up with its IPO and put pressure on secondary market liquidity, isn't ready yet. Investors, who set aside funds for this IPO, are reallocating to other IPOs. Hence, Rossari Biotech, Happiest Minds, Route Mobile, Chemcon Speciality Chemicals saw excellent listing gains.
Going ahead, we expect the IPO activity to be favourable and investor participation to continue, provided the IPO pricing is right and business fundamentals, financials remain healthy. Near term international and domestic matters like US presidential elections, global liquidity, state of Indian economy, government finances, coronavirus vaccine, Union Budget in February will continue to influence capital markets. At the same time, India-China trade issues, central government's focus on Atmanirbhar bharat and divestment process, could provide the necessary impetus for many unlisted private companies to come forward, raise capital for business expansion and contribute to India's growth story. Promoters & merchant bankers must leave something on the table, for investors to make appreciable listing gains and ensure IPO's success.
Q: Do you think the speciality chemical sector will double investors' wealth in next couple of years?
An internal research by FYERS team on the best performing listed companies over the last 29 years showed that, chemicals as a sector has grown tremendously, with maximum number of stocks returning greater than 100 percent return in the last two decades.
•>> Between 1991-2000, out of 62 stocks giving simple returns (without including dividends) greater than 100 percent, 4 stocks were from chemicals sector
•>> Between 2000-2010, out of 973 stocks giving simple returns greater than 100 percent, 101 stocks were from chemicals sector.
•>> Between 2010-2020, out of 560 stocks giving simple returns greater than 100 percent, 82 stocks were from chemicals sector.
With chemicals of different types – basic, agro, fine, specialty – offering wider applications on a continuous basis, this sector is expected to grow further. During the inaugural session and launch of India Chem 2021 at 'Specialty Chem 2020', Chemicals and Fertilisers Minister D V Sadananda Gowda said, 'Indian chemical industry has a huge role to play to make India a $5 trillion economy, with a potential to contribute $300 billion to the GDP by 2025". "There is a need to make the R&D ecosystem stronger to come up with enhanced products, aligned with the changing requirement of the industries," he said.
Barring a handful, which have a market cap greater than Rs 10,000 crore, almost as many as 150 companies are in the small or micro-cap category. With huge focus on self-reliance, many niche companies in this sector do possess the necessary potential to create new applications, expand geographical presence, and become the beneficiaries of tremendous growth over the next few years, thereby rewarding investors in this process.
Q: Is it a buy on dip or sell on rally market given the current sentiment, and why? Also what is your outlook for October month after over a percent fall in September amid volatility?
Markets were quite volatile for a large part of September. The most important development from a technical standpoint was that Nifty broke the sequence of higher highs and higher lows which was in place since the 52-week lows of March 2020. For the first time in over 6 months, Nifty made a first sequence of a lower high and a lower low, a sign that the uptrend has probably ended. However, over the past few sessions, the index has managed to take support right above the 200-day moving average, from where it has staged a smart recovery.
Another important aspect to consider is the impending US presidential election, which could impact global markets, either positively or negatively depending on the outcome. An analysis of Nifty50 performance for the 3-month period before and after US elections, over the past 20 years hasn't provided any discernible trends.
Q: Have you spotted any particular sector/sectors which have not participated in the recent rally and hence this could be right time to invest in that/those sectors, why?
Post the stock market crash in March, the rally across certain sectors and stocks has been nothing short of mind-boggling, with dozens of stocks giving returns greater than 100 percent over the last 6 months. Abundant liquidity across global markets aided in stock market rally. The recent SEBI circular on asset allocation of multi-cap mutual funds provided sufficient ammunition to investors, to look at small and midcap stocks for fast gains.
Momentum investors made tremendous profits, while value investors' portfolios continue to languish on the sidelines. IT, pharma, auto, media and metals were the 5 best performing sectors, as banking and financials, consumption, infrastructure continue to underperform in general.
The ensuing moratoriums and loan restructuring schemes cast a shadow on the asset quality of all financial institutions. The financial sector cannot stay neglected for long and, post Q2FY21 results, investors with a time horizon of 1-2 years can look at good quality banks and NBFCs for investment.
As the unlock process continues, economic activity is expected to increase substantially. In this regard, consumer durables, consumer discretionary related sectors are bound to find favour during the upcoming festive season. Personal mobility is back in focus and two-wheeler as well as four-wheeler stocks offer good investment opportunities. Hotels and hospitality sector could take time but at the current juncture, long term investors can surely accumulate them at affordable valuations. Few sectors which will track the economic unlocking would be realty (work from home theme), infrastructure (government project spending) and metals (diversified construction activity).
Q: What are your thoughts on the current market volatility which has been for a month now?
The coronavirus pandemic took most countries by surprise, especially with forced lockdowns resulting in shutting down of economic activity. Stock markets across the world cracked and volatility hit the roof. India was no different. The last time India VIX convincingly crossed the 40 mark on the upside was in 2008 – at the peak of global financial crisis. It took almost 14 months for VIX to climb down back below 40. But this time in 2020, the upsurge in volatility lasted for less than 3 months. With appropriate guidelines and measured unlocking of unaffected zones, volatility has remained under 25 since August.
Global liquidity, spread of coronavirus infections, economic parameters have influenced volatility to a great extent. Higher FII selling and lack of DII buying during the month didn't help the cause. These bouts of high volatility have become part and parcel of the game. Traders, who grappled in the initial stages, have come to terms and continue to devise strategies to reduce the impact on their returns. On the other hand, many long-term investors continue to use these opportunities to build stronger and diversified portfolios at cheaper or reasonable valuations. Since peaking out above 80 in March, the India VIX has steadily moved lower and now stands near a 7-month low, indicating that, despite the minor turbulence witnessed last month, market participants continue to hold their ground and expect the rally to continue in the days ahead.
Q: September quarter earnings will begin in October. What are your expectations and what could be gainers/losers in this earnings season? What would be key things to watch out for?
Earnings growth of companies has been a cause of concern over the last few years. The expectation of a double-digit earnings growth hasn't really fructified across several sectors and the reasons cited are many. Even in FY21, the situation remains the same, if not worse, due to the debilitating effects of coronavirus pandemic. H1FY21 could be considered a washout for many consumer facing sectors.
For Nifty 50 companies, consolidated net sales for Q2FY20 stood at Rs 12,03,672.6 crore with profit after tax at Rs 81,096.2 crore. In comparison, net sales for Q1FY21 stood at Rs 9,09,148.5 crore with profit after tax at Rs 46,069.6 crore. Hopefully, the second quarter results of the current financial year will show a marked improvement from the previous quarter results and inch closer to the year-on-year performance.
However, some sectors have shown resilience and a limited few are exhibiting greenshoots. IT sector continues to be in focus, with strong deal pipelines, amply supported by rising digital spends in consumer and medical industries. Cost efficiencies owing to work from home, efficiency of supply chains and increased outsourcing are expected to contribute to higher growth and better margins from most companies. Expect largecap companies to steady their margins and midcap IT companies to boost their margins.
For Nifty IT index companies, consolidated net sales for Q2FY20 stood at Rs 1,11,339.7 crore with profit after tax at Rs 19,224.2 crore. In comparison, net sales for Q1FY21 stood at Rs 1,12,336.7 crore with profit after tax at Rs 18,613.0 crore.
Pharmaceuticals is another sector which flourished during this quarter. With strong demand for APIs, multiple new drug launches, USFDA approvals and a strong ANDA pipeline, favourable government policies, many companies were/are undergoing rerating to reflect their FY21/22 earnings growth. Certain large companies worked towards settling their pending litigations, boosting sentiment and investor interest. The result: BSE Healthcare index hitting record highs recently, with a dozen companies hitting their all-time highs, while many companies hit their 52 week highs. Quite a turnaround for the sector which hasn’t delivered notable returns or earnings over the last 5 years.
For Nifty pharma index companies, consolidated net sales for Q2FY20 stood at Rs 36,520.8 crore with profit after tax at Rs 4,449.4 crore. In comparison, net sales for Q1FY21 stood at Rs 36,434.0 crore with profit after tax at Rs.2,242.9 crore.
On the other hand, these two sectors have provided handsome gains in the recent past and in the near term, stock prices could remain volatile, influenced by US presidential election and profit booking.
With festive season on the anvil, auto sector is back in focus. Personal mobility has gained ground during the pandemic and with unlocking of the economy, two-wheeler as well as four-wheeler wholesale numbers seem to be improving on a month on month basis. While pricing pressures exist due to introduction of BS VI models, cheaper raw materials are expected to dent cost pressures. This sector should gain traction going forward into the second half of the year, with commercial vehicles segment also picking up pace due to expectations of a higher economic activity. Affordable auto loans from most banks are on offer during this festive season to support the massive buildup of inventory at dealer level.
The most important sector, accounting for a large part of major indices as well as investor portfolios, is the banking, financial and insurance services sector including the broking services space. With moratoriums coming to a close, investors would be keen to watch the financial performance of banks and NBFCs. Stronger balance sheet companies are bound to find investors interested in picking up companies at reasonable valuations. While the asset quality and NPA picture would be available post March 2021 closing of accounts, retail banks and consumer lending NBFCs will be in focus.
An opening of 3 million new accounts during the period between June to August period is expected to definitely boost the earnings of most broking companies. Usage of e-KYC, ease of mobile trading apps, and availability of capital and time due to work from home has increased traded volumes multifold.
Through the lockdowns, while supply of essential food and related items continued, the disruption in supply chains and shutdown of manufacturing facilities in containment zones affected the FMCG sector. The financials weren't exciting and investors gave a pass up to companies in this sector. For Nifty FMCG index companies, consolidated net sales for Q2FY20 stood at Rs 53,810.8 crore with profit after tax at Rs 9,043.4 crore. In comparison, net sales for Q1FY21 stood at Rs 45,641.5 crore with profit after tax at Rs 6,904.5 crore. This is the sector which can surprise on the upside in the upcoming quarter.
Overall, we expect the quarterly results to be subdued to average in the sectors which continue to be impacted in terms of financials, but provide directionality through management commentary and efforts undertaken to regain lost ground – in business and margins.Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.