As we have moved to 2-year target prices, our house view on the auto is positive, with top picks being Escorts, Ashok Leyland, Hero MotoCorp, Arjun Yash Mahajan, Head - Institutional Business, Reliance Securities, said in an interview with Moneycontrol’s Kshitij Anand.
edited excerptQ) Indian market hasn’t looked back after hitting a low in March. What is leading to optimism?
A) India broader index Nifty50 hit 7,511 on Tuesday 24 March 2020 and since then it has only moved one way and that is up. Earlier in the week, the index closed at 10,167.45 i.e. 35.4 percent return in just 50 trading days.
The optimism is backed by global liquidity and also a lack of alternate investment avenues. As anecdotal evidence, FPI flow into India since 24 March 2020 has been positive ~ US$2.6bn.
Add to this, the lockdown made people sit at home and one has seen a record number of online trading accounts being opened. To sum up, liquidity, lack of other investment avenues has led to this 35.4 percent return since 24 March 2020.Q) If we have made a bottom then this would be the shortest bear market of all times. It went down in a hurry and then rallied in a hurry as well?
A) Well, in my opinion, this is a long DCB (Dead Cat Bounce), which has lasted much beyond its life. I will only like to draw your attention to the very fact that it is still very early days to understand the actual ramifications of the March, April, and also part of May lockdown on the entire industry and economy.
I don’t think anyone at this juncture is in a position to put a finger to the exact hit the economy and the industry has taken. We do see various reports about GDP being in the negative territory for FY21, but they are all model-based numbers.
The exact impact will be known from July 2020 onwards and then we will be in a better position to access the hit and the impact. I feel it is still early days and I will be cautious.
It never hurts to book profits and take money home. You will always get another opportunity to come back into the markets.
I hope I am wrong, but I see a big dichotomy between the current market levels and the underlying economic fundamentals.Q) Which stocks and sectors are likely to benefit the most as and when lockdown opens?
A) When the full lockdown opens, we should see some activity coming back for airlines, auto, 2-wheelers, retail, cement, metals. These are the sectors that have taken a beating and rotational theme will benefit them.
Money may and should flow out of sectors and stocks that have seen a sharp recovery and flow into the sectors I have mentioned earlier.
However, I am of the view that when the full lockdown opens, it will be a very short-lived one. We are seeing cases rising every day and each day it’s a new high. With the onset of Monsoons, the fear of rising COVID-19 cases increases.
Again, I hope I am wrong, but every day there is a new high of new cases in India and if we were to go by the media reports, the hospitals and medical facilities are being stretched to the limit.
These are not very encouraging signs and it just points towards both state and central governments being forced to go in for another lockdown, much against the wishes of the industry and adding further woes to the economy.Q) What is your call on financials, metals, auto and realty sector? Each one of them are going through their own sector-specific troubles. How should investors play them?
A) I will only talk about auto, as other sectors, we are still in the process of initiating coverage. As we have moved to 2-year target prices, our house view on the auto is positive, with top picks being Escorts, Ashok Leyland, Hero MotoCorp.
In the 4 wheelers – PV will continue to face demand headwinds as these are large ticket items and any buying will be pushed back.
June, being the first full month of operations post lockdown, may see some pent-up demand coming back. However, this will be short-lived. We hear about job losses across industries and in this background, any new customer will push back buying a PV for now and will want to preserve his capital/cash.
There are other areas like EMI, food, school fees where the capital will be deployed for now.Q) Which sectors are likely to lead the next leg of the rally?
A) I will like to focus on stocks rather than sectors. On normality returning, I will stick with the large caps which have cash and low debt on the balance sheet.
As mentioned above, I see another down move and in that case, at current levels, I will sidestep and look for better entry points.Q) Monsoon got off to a stormy start – what is your outlook? Stocks & sectors that will benefit the most?
A) We are all dependent on the Met department for the Monsoon outlook. They say it is going to be a normal monsoon, so for now let’s go by that and its good news for the agriculture sector.
Govt has already announced an increase in MSP, thus Agri related stocks have and will continue to do well. Escorts is our top pick. 2-wheelers can be also a beneficiary, thus Hero Motocorp, our other top pick in the auto sector, can be considered.
For both Escorts and Hero, I will wait for better entry levels – Hero (~Rs2000) and Escorts (~Rs825-850).Disclaimer
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