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Last Updated : Jul 25, 2020 12:07 PM IST | Source: Moneycontrol.com

'High liquidity in financials, fall in bankruptcy risk bolstered investor trust despite lack of growth'

Based on valuation terms, currently the market is above the pre-COVID level, S&P500 is at 22x on P/E 12-month forward basis compared to 18x.

Moneycontrol Contributor

Vinod Nair

Currently, the market is inching positively on a weekly basis, supported by a sector or stock on that particular week. This time it was Banks, Auto and IT.

In the context of the overall trend, we should state that it is largely due to positive developments in global market, this week it was due to the huge qualitative stimulus being considered by European Union and before this, it was the stimulus package announced in the US and India.


This week, a better set of initial Q1 results, by high weighted AND quality companies, has helped the market. A high amount of liquidity in the hands of investors while fall in the biggest risk, which was the bankruptcy of private assets, has added trust between investors and the equity market. This trend is expected to continue at least in the near-term unless we come across any undesirable increase in risk.

We have a positive view on Pharma and expect it to outperform the market for at least the next 2-3 years. We expect valuations to expand further which will give investors further opportunity to enter this space. One needs to note that Pharma outperformed the market from the low made in March but has underperformed in the last 3 months. Also, Pharma was among the worst performers from 2016 to 2019 due to disruption in the business model lead by pricing and regulatory issue in US FDA. This view has completely changed with a likely preferential status for Indian pharma in the global market post-COVID-19. The vaccine is an opportunity for the sector but we don't expect it to boost profitability, especially for listed companies because they are in the 1st and 2nd phase of testing but it will benefit the overall Indian Pharma sector as they are a key source of capacity to manufacture a huge number of doses in the future.

Overall demand and queries have already increased due to world health crisis and will lead to much higher valuation compared to the downgrade in the last 3-5 years. The outlook was impacted by regulatory fallout in US FDA observations and pricing issue in the US. Today, this concern has reversed into an opportunity as Indian companies become the preferential provider of pharma products in the US and world. The stocks which are our top picks is Torrent Pharma, Biocon, Dr Reddy's Laboratories and Cadila Healthcare.

Our current view on the market is getting cautious on a weekly basis, due to high valuation and weak Q1 results. The consolidated PAT of Nifty50 constituents is expected to de-grow by -38 percent on a YoY basis, as per our assessment of Bloomberg consensus estimate of respective 50 constituent companies. The silver lining is that growth is expected on a QoQ basis due to the low base of Q4 FY20. Few sectors like Banks, NBFC and Pharma will do better due to a fall in provisions, income from investment and demand for healthcare while some sectors like IT and FMCG are expected to have minimal impact.

The initial results are marginally better-than-anticipated, mainly supported by IT and Banks. IT, due to positive guidelines by management, deals and better financials from Q2 onwards. Also, post-COVID the outlook and need for digital has increased. Cost is likely to be supported by Work-from-Home, we think that this is a good investment opportunity in such a situation, though in the near-term some consolidation on the stock to stock basis can happen. The outlook for Banks has improved a bit lately due to fall in moratorium and provisioning. Even though initial results are better than anticipated, the end will be watchful. The real effect of NPA will be understood post-August when moratorium gets lapsed.

Currently, the market is trading ahead of fundamentals, the world equity market is up by about 50 percent, from the 52-week low, in less than 4 months, just a few fractions behind the pre-COVID level high made in February, India is too under no exceptions. This rally had first initiated in the US market while the rest of the world was underperforming. Now the US is underperforming, based on last 1 & 3 months data, India is up by 9 percent and 25 percent respectively while US S&P500 is up by 5 percent and 15 percent, lower than us. This is a normal tendency of the best to perform first and then consolidate, the final trend of the cycle is evolving currently.

Based on valuation terms, the market is currently above the pre-COVID level, S&P500 is at 22x on P/E 12-month forward basis compared to 18x. And Nifty50 one year forward P/E is at 20.5x which is higher than 18.5x before COVID. It may be high due to low actual earning of FY20 and lack of growth in FY21. This may be also high due to the performance of a few sets of stocks with high weightage. Still, on a historical basis, we are in the bubble region in terms of valuation and it is advisable to be cautious and place assets in safe categories and sectors.

The author is Head of Research at Geojit Financial Services.

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.
First Published on Jul 25, 2020 12:06 pm