If the world is able to tackle the coronavirus outbreak in Q1, then the recovery can still pick up steam from Q2, given the flood of liquidity and QE programmes being launched by central banks, Himanshu Gupta, VP Research, Globe Capital Markets, tells Moneycontrol's Sunil Shankar Matkar in interview.
Q: Everyone says valuations turned attractive. Do you feel it is the right time to buy or be on the sidelines to settle down the market? What is your advice to your clients and what should investors do with their portfolio?
Learning from the past experiences of bear markets, I would say one cannot time the exact bottom in markets. The recent recovery from sub-8,000 levels to 9,200 levels only took four trading sessions, though it was immediately sold but the point I am trying to make is that this could only be a trailer and in case any positive development on COVID-19 cure is found, the markets would go spiralling higher and I don't think most people would be in a position to buy on that particular day.
No doubt there is still no breakthrough in the coronavirus pandemic crisis but at the same time, we believe that the amount of liquidity being poured by central banks over past fortnight will help the economies to get going to a great extent. Valuations are no doubt very compelling in select pockets and we are advising a staggered buying approach to the investors. For existing portfolios, I would say now is not the time to liquidate in panic rather a systematic buying approach can turn out to be rewarding in long term. Word of caution remains in terms of averaging the poor businesses as it will lead to missing out on what looks like a life-time opportunity to acquire strong businesses at attractive values.
Q: Banking and financial services have taken a huge beating due to worries over likely NPA pressure after the lockdown. Do you agree and will the banks lose their leading weightage position in the benchmark indices?
Yes, there are concerns over a potential upward pressure on NPAs in banking in NBFCs, which is why there has been an increased selling pressure seen on the sector over the past few weeks. It appears that this sector can take some time to get on track. However, the previous major NPA cycle is taken care of, so the balance sheets of most of them are pretty clean at this point in time. It is, too, early to say they will lose their weightage in benchmark indices, given that the financial sector is the backbone of any economy and only a healthy financial ecosystem ensures ample liquidity at effective cost.
Q: Autos have lost steam in the market turmoil and the lockdown. Do you think the sector will find it difficult to get back on track in 2020?
The slowdown in the autos started long before the COVID-19 episode, as the sector was grappling with its own concerns. As of today, most of auto players are ready with BS-VI norms and whatever BS-IV inventory is at hand has been priced in. Also, the rural two-wheeler players are likely to show the recovery fast, given the expected shift towards the private vehicles demand post the pandemic and lower ticket prices compared to the four-wheeler. Also, the decline in the raw material prices will help to improve the bottomline for automakers. I think the next quarter is a good time to start accumulating into the auto sector.
Q: Considering the increase in infections and deaths, do you think the government will extend lockdown beyond April 14 to control the virus spread?
A lot will depend upon the number of new cases coming out between now and then. I think if the exponential growth in the number of new cases does not stop, it lockdown) can be extended for some more time. However, if the graph starts to come down, the lockdown can be eased with some restrictions being extended for some more time.
Q: Experts are finding it difficult to quantify the impact of the lockdown and COVID-19 on earnings. Do you expect major downgrades after Q4FY20 and Q1FY21 earnings, and what are your expectations for Q4? Also, do you expect major deterioration in earnings growth for FY21?
The 21-day lockdown is expected to hit the topline by approximately 8.5-9 percent, which will also hit the bottom line. Since the complete lockdown was implemented from March 22, so Q4 numbers are expected to be a notch lower for most of the sectors, especially domestic businesses. Companies having global exposure, especially to China and Europe, must have taken a hit in that period as well.
For Q1FY21, yes, a significant deterioration in the numbers should be expected given the global lockdown situation. For FY21, I think we need to wait for some more time to take the call. If the world is able to tackle the COVID-19 in Q1, then the recovery can still pick up steam from Q2, given the flood of liquidity and QE programmes being launched by central banks.
Q: Have you started buying strong stocks at these attractive valuations and if yes, then what are the top five multibagger bets?
Tata Chemicals: Chemicals as a sector looks promising, given the substantial shift of business from China to India. TCL is likely to benefit from lower energy prices and the leadership position in soda ash. The strong cash holdings in the balance sheet and positive future cash flows shows strong financials. The management has also increased its stake after the recent decline in the stock price suggesting a strong conviction in the business model.
Indraprastha Gas: The stock has witnessed a strong buying interest over the past one month, given the promising long-term growth amid new licences and strong future cash flows. The stock is expected to show sustained strong growth, as the short-term decline in demand is already discounted.
Reliance Industries: The stock has given a sharp correction on the concerns of decline in demand of petrochemical and refined products due to COVID-19. However, the stock offers decent value at current levels given the sustained profitability going ahead in the energy business on account of lower oil prices as well as improving pricing power in telecom.
Hero MotoCorp: The stock is offering good upside potential over the coming quarters. The company has already cleared 90 percent of the BS-IV inventory and the rural demand is likely to pick up given the lower price compared to four-wheeler and good kharif crops.
ITC: The stock is trading at a steep discount to its peers and has been under pressure over the past few quarters. The stock offers a nice diversification within tobacco, FMCG, hotels and paper businesses. At current valuations, the stock looks very attractive for a long-term portfolio.
Q: Given the speed of the rise in infections and deaths in the US and Europe, do you think FIIs will remain net sellers in coming weeks? Also, do you feel FIIs outflow in the cash market in April will be higher than March 2020?
The extent of selling by the FIIs over the past week has come down. We expect the selling to reduce significantly lower in April on account of deep value emerging in the broader markets, which will attract foreign long-term investors.
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