HUL to underperform in short term given expensive valuations: Ashish Chaturmohta

A) As the coronavirus brought the global economy to a standstill, the market world over witnessed a rout. In April, bounce back was seen after a vertical fall.

Initially, it was led by defensive sectors like FMCG and Pharma. Recently, it was fueled by Auto and Commodity relief rally along with Banks and IT sector.

Q) As we close the month of April on a positive note after a massacre in March – how is May likely to pan out for investors. There is a very popular Wall Street adage ‘Sell in May and Go Away’? Do you think we could hold onto gains if not why?
A) The Nifty50 has now retraced 50 percent of the whole decline, so the index is approaching a resistance zone in terms of retracement levels.

It needs to be seen that the market can sustain at current levels and some profit booking may be expected.

Q) What is your call on Banking and auto stocks which have run up quite sharply in the week gone by?
A) Though banking stocks have rallied recently, they are not out of the woods yet and are still within a range of 6 weeks. So, banks need to show follow-through action from here on for a fresh rally to emerge.

The auto sector was in pain long before the pandemic hit and was one the weakest sector. So, for now, it seems like a relief rally coming off a low base.

Q) What are the important factors which investors could track in the coming week, and in the month of May which could dictate the trend for markets?
A) Relaxation in lockdown, economic policy measures, and how the activity at the ground is picking level is likely to dictate the market direction, going forward.

Results season has already started and it would provide a peek on how earnings will be impacted in next quarter.

Q) What is your view on Tech Mahindra and HUL which came out with results on Thursday? What should investors do – buy, sell, or hold?
A) The HUL result was disappointing with a volume de-growth of 7 percent, the number not seen even during the demonetisation period. Personal care and ice cream segments witnessed a soft demand leading to the weak performance of the company.

In the short run, the stock is expected to underperform given the expensive valuations and poor quarterly performance. However, in the medium term, HUL should farewell as it will be a key beneficiary of the rural demand recovery and one of the least impacted companies from COVID-19 led disruptions.

Tech Mahindra too disappointed the street with a 29 percent fall in earnings. COVID-19 led disruptions are bringing extraordinary changes in the business models of the IT industry. Hence, it will be important to see who all are able to adapt to the rapid changes.

While the stock has corrected by about 35 percent over the last two months, it not expected to rally in the near term in absence of any strong trigger.

Q) What are your view on RIL results and Rights issue and what should investors do? Do you see a positive/negative reaction on Monday?
A) RIL reported a resilient performance in all the segments even in this challenging quarter. The company also announced a rights issue of Rs 53,125 crore. This is a step towards the company's target of becoming a zero-net debt company by end of current fiscal.

Promoters are expected to fully subscribe to the rights issues which will instil confidence in investors' minds about promoters’ commitment to the business in addition to improving the balance sheet strength. We believe investors should take this positively.

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