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HDFC Securities picks 16 stocks post Q1 earnings, keeps cautious stance in near-term

The brokerage believes Q2 and Q3 results will be better indicators of the underlying demand conditions, and stress in the banking sector as supply chains settle down, moratorium period ends, and festive season kicks in.

August 21, 2020 / 06:19 PM IST

June quarter earnings played a key role in the rally seen in last couple of months apart from ample global liquidity support and improvement in economic data points after the beginning of unlocking process.

Sensex, Nifty and BSE Midcap indices gained around 16 percent each, while BSE Smallcap index climbed over 19 percent indicating that the participation was seen across segments.

Largely, expectations for the June quarter earnings were subdued given the lockdown in most part of the quarter, but still leading companies across sectors either beat the expectations or reported in line results. Some of them beat the expectations on the operating front, too.

"Q1FY21 was indeed an exceptional quarter, given the impact of COVID induced lockdown, which tested the resilience and agility of business models. As we are nearing the end of reporting season, it has turned out to be a satisfactory one versus the heightened fears and muted expectations," said HDFC Securities Institutional Research in its report made by Varun Lohchab and Punit Bahlani.


Earning misses were more prevalent in autos, consumer discretionary, energy, insurance, and AMCs while hits were mainly in IT, pharma, cement, chemicals and banks, the brokerage added.

IT was the leading gainer among sectors in June-July, showing nearly 30 percent rally as work-from-home played a key role along with improved pricing power. Pharma gained nearly 17 percent as COVID-19 crisis increased demand for the sector and Bank was up 11 percent amid improving moratorium trends for lenders. Auto also surged 17 percent despite weak earnings, but the sales data and improvement in economic activities along with better monsoon lifted sentiment.

"Key highlights of the June quarter earnings were positive management commentaries on June/July exit run-rate of revenues as unlocking led to sharp demand rebound in multiple sectors, viz., staples, paints, select autos, cement, insurance, IT, metals, energy; and continued market share gains for the larger companies versus smaller players and those from the unorganised sector during Q1," HDFC Securities said, adding the sharp uptick in capital markets activity was leading to strong performance for brokers and exchanges.

The brokerage believes the Q2/Q3 results will be better indicators of the underlying demand conditions and stress in the banking sector as supply chains settle down, moratorium period ends, and the festive season kicks in.

Given the sharp pullback in markets and Nifty valuations back to 18x FY22, markets would await more concrete evidence of a sharp FY22 earnings rebound, which is currently built-in, it feels.

The benchmark indices rallied around 51 percent from March lows and the broader markets also equally participated in the recovery amid hope that FY22 would be better year than FY21.

As a results the indices were back to pre-COVID levels and valuations are also not reasonable, experts feel.

"With recent run-up back to pre-COVID levels for most sectors (except financials, infra, and metals), risk-reward has again turned unfavourable with limited upsides on our top picks. Hence we are cautious in near-term, but bottom-up opportunities still visible across sectors as economic recovery plays out in FY22/FY23," said HDFC Securities.

Its largecap picks in the model portfolio include Reliance Industries, Bharti Airtel, Infosys, ITC, SBI Life Insurance, ICICI Bank, Axis Bank, and L&T.

Within midcaps, the brokerage likes Max Life, Indraprastha Gas, Gujarat Gas, Crompton Consumer, Alkyl Amines, Galaxy Surfactants, JK Cement, and KNR Construction.

"We maintain a mix of defensives (telecom, IT, pharma, and utilities), quality cyclicals (select banks, cement, autos, infra, and consumer discretionary) with a positive bias towards technology (telecom and IT) and manufacturing-led gradual economic recovery, which we play through cement and select financials/industrials," said HDFC Securities which is now building in -5/+41 percent YoY growth for aggregate PAT for FY21/FY22 respectively.

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first published: Aug 21, 2020 03:04 pm
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