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Last Updated : Aug 14, 2020 01:31 PM IST | Source: Moneycontrol.com

Independence Day advice: Focus on businesses least hit by COVID, these 5 sectors are a good investment

We recommend companies having prudent management, strong corporate governance, lower debt to equity ratio and sound balance sheets, says Ajit Mishra of Religare Broking,

Sunil Shankar Matkar
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Todays L/H

Investors should follow the bottom-up approach and focus on businesses that have been less impacted by the coronvirus disruption, have a long-term growth potential and strong fundamentals, Ajit Mishra, VP Research, Religare Broking, says in an interview to Moneycontrol's Sunil Shankar Matkar. Edited excerpts:

Q: The RBI finally announced a one-time loan restructuring plan but with riders. What are your thoughts and will it solve banks’ NPA (non-performing assets) problem?

We believe this move would alleviate immediate stress faced by banks and help them to navigate through this difficult time without putting much pressure on their asset quality. However, it will be early to comment on whether it will resolve their NPA problems as the extent of the crisis is still not known.


Q: Following the mid-May rally, do you think the market is due for a major correction that can drag the Nifty to 10,000-mark or is it just consolidating to march towards 12,000?

The rally has been largely driven by overwhelming liquidity, strong performance from the global counterparts and better-than-expected earnings announcements. Besides, the news of successive vaccine trails has also subsided the fear of a prolonged slowdown. On the flip side, though the economies (worldwide) are seeing healthy recovery, it remains below normal. Also, earnings outlook continues to remain uncertain. Moreover, on the valuation front as well, the benchmark indices are trading near record multiples.

Amid mixed signals, we might see phases of intermediate correction in the benchmark but a possibility of sharp decline looks slim, considering the buoyancy in the global markets. In case of a major correction, the Nifty would find strong support around 10,500-10,650 zone. On the higher side, 11,600 and 11,800 levels would act as critical hurdles.

Q: The broader markets still look strong. Do you think midcaps and smallcaps can beat the benchmarks this year, especially after underperforming them for two years?

With the rally in the benchmark, the broader indices have also been witnessing noticeable traction for the last five months. And, we may see selective outperformance, thanks to valuation comfort, improving financials and healthy long term growth prospects. However, we would advise investors to be careful and follow a stock-specific approach as we have already seen a strong recovery from March lows. We recommend companies having prudent management, strong corporate governance, lower debt to equity ratio and sound balance sheet.

Q: The IT index did not see major impact of lockdown. In fact, work from home helped IT companies in saving costs. Have you increased your exposure to IT and what is your pecking order?

IT companies' financials are improving on the back of healthy order pipeline, robust deals, optimistic guidance from management and strong balance sheets. Going forward, the sector's growth would be driven by government initiatives for Digital India and support building the IT infrastructure for other sectors for business continuity and growth.

Among the players, Infosys tops our list followed by TCS, Tech Mahindra and HCL Technologies.

Infosys: It is one of the preferred picks in the sector as the company posted better earnings and its outlook is likely to improve on the back of robust deals, strong management, increased focus towards digitalisation and demand recovery.

TCS: Q1FY21 was a muted quarter for the company, however, we believe that with its focus on core activity, emphasis on digitalisation (more online transaction and cloud technology), adoption and upgradation of technology and customer-centric approach will help the company bounce back in the coming quarters.

Tech Mahindra: The company can face headwinds in the near term due to a decline in discretionary spend as well as delay in the execution of deals. Nevertheless, its medium to long-term growth scenario is likely to improve post H2FY21E led by a huge opportunity in 5G, strengthening of its digital business, tapping of new geographies and higher synergies in the telecom sector. We are positive on the stock for the investment horizon of at least one-two years.

HCL Technologies: The company’s growth will be driven by the adoption of cloud and digital technology as well as focus on the core business. Further, the management, too, remains positive on a strong deal pipeline as well as winning large deals in the coming quarters, which will help revive its revenue and margin.

Q: What is your advice to investors and traders on this Independence Day?

We are advising investors to follow the 'bottom-up' approach and focus more on identifying businesses that are less impacted due to COVID-led disruption, have long-term growth potential and strong fundamentals.

Based on these criteria, stocks from agri and allied sectors, pharma, FMCG, insurance and select private banking space are better positioned for investment.

Q: Pharma is the leading sector in the current rally. Would you still want exposure to this sector?

The pharma sector has been among the least impacted with the COVID-19 crisis as it witnessed incremental demand for products during the lockdown. Besides, it had been an underperforming counter for the last several years and was available at an attractive valuation. Thus the sector witnessed a sharp rally and mostly stocks are now either trading to their record high or reached closer to the 52-week high zone.

Going forward, some correction cannot be ruled out at higher levels but investors should take this opportunity for buying, given healthy long-term growth prospects, strong product pipeline, robust financials and prudent management, which would continue to cheer investor sentiment. Also, there are high expectations of launching the COVID vaccine and demand for other medicines is also largely consistent.

Q: The government has banned imports of 101 defence items to give a boost to Make in India programme. Are you a buyer of defence stocks and what is your advice to investors?

India is one of the top importers of defence equipment and the government's increased focus on Make in India initiative as well as reduction in imports is an impetus to growth for defence stocks over the long term. However, it is important to note that the government is likely to struggle to meet its revenue target, which could lead to a reduction in defence spending, at least in the near future. Nonetheless, the long-term growth prospects remain positive for defence companies and it will be prudent to buy these stocks (HAL, BEL, BEML and L&T) on dips with two-three years investment horizon.

Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
First Published on Aug 14, 2020 01:31 pm