Earlier in March-2020, when COVID-19 pandemic hit, Indian IT Services stocks corrected sharply in April & May. Resilient operating model and strong balance sheet limit potential downside due to adverse macro environment. We remain buyers in largecap IT stock on declines," Devarsh Vakil- Deputy Head of Research at HDFC Securities said in an interview to Moneycontrol's Sunil Shankar Matkar.
Edited excerpt:
Q: Many experts feel the actual picture of bad loans will be clear once the six-month moratorium period ends on August 31st. What are your thoughts? Should one stay with banking & financials space?
Even as the nationwide lockdown gradually lifts, there is more than enough evidence to suggest that the economic impact of COVID-19 is set to linger. While the moratorium will optically limit gross NPAs till first half of FY21, asset quality deterioration is inevitable. The true picture will be visible after completion of the moratorium period and it will be crucial to see if this starts a new NPA cycle for the finance sector. Banks have to be ready with capital buffer for large provisioning needs if required.
It seems that all the earlier progress on recognition of bad loans has been undone with the moratoriums and it is bound to hamper the credit culture in the country. The actual performance of sector shall be masked on account of moratorium, loan growth backed by emergency funding to MSME under Aatmanirbhar Bharat scheme and refinancing of loans by banks which are flush with liquidity at this moment.
It will be crucial to monitor if RBI allows one-time restructuring of accounts, which the sector is demanding.
Many banks in private sector banks as well as NBFC are preparing themselves with huge capital raise to tackle the situations. Trading gains on bond portfolio for the banks with a continued decline in yields will also help garner resources. In addition, some of the big banks are likely to sell some stake in their profitable subsidiaries to raise funds. Banks who have adequate capital to navigate these turbulent phases are likely to come out as a winner. Some of the top private sector banks look attractive to us for long term investments.
Q: Most of technology stocks are near their 52-week highs given the strong results from Infosys and Wipro despite COVID-9-led lockdown, which clearly indicated that work-from-home has been working smoothly for them. So what are you advising to your clients now and what is the rationale behind it?
Earlier in March-2020, when COVID-19 pandemic hit, Indian IT Services stocks corrected sharply in April & May due to potential impact on global growth stemming from the COVID-19 pandemic. Even Midcap IT stocks had seen significant correction and had become quite attractive.
The analysis of market commentary of key IT companies indicated that travel, hospitality and transport vertical are likely to witness the highest negative impact. Retail, Energy and Manufacturing vertical would also witness some pressure. On the other side, while the banking and financial services have been stable, telecom, technology and healthcare verticals have witnessed significant growth.
Resilient operating model and strong balance sheet limit potential downside due to adverse macro environment. We remain buyers in largecap IT stock on declines.
Q: The flow into equity-oriented mutual funds has been declining consistently for last three months and SIP also has seen a moderation during the same period. What is the major reason behind it and will the trend continue in coming months too?
Net inflows into equity funds have moderated in the last month but it is likely to improve from next month. We had seen drastic fall in equity net inflows to Rs 240.55 crore in June (lowest in over 4 years). This sharp fall in equity inflows during June was mainly on account of higher redemptions/profit booking. Gross subscriptions into equity categories for June month was in fact moderately better than the previous month. Investors after having seen sudden value erosion due to COVID crises; a surge in Nifty of about 49 percent from March lows prompted many to book profits and move some capital to cash. Much of the profit booking was seen in Largecap & Multicap funds which recovered faster.
Also, all the inflows were mainly through online route amid complete nationwide lockdown in April & May 2020. Uncertainty in the stock markets on the back of the pandemic crisis, concerns of global slowdown and forecasts of lower economic growth might have kept investors on sidelines in April & May 2020. Economy is showing some signs of picking up as evident from new trending indicators - Google mobility reports, rise in GST E-way bill, power demand; as opposed to traditional data with comes with a lag. Higher participation of retail investors through direct investment in stocks might have contributed to such moderation but this will not impact the flows into equity funds in any major way.
SIP inflows dipped marginally (2.4 percent MoM) and ended a tad lower than Rs 8,000 crore mark (Rs 7,927 crore in June 2020). SIP inflows haven't receded significantly despite volatility in the equity markets. In fact 9.13 lakh SIP accounts were added in June 2020 taking the total mutual funds SIP accounts outstanding to 323.4 lakhs.
Q: The economic and virus-related news is not good. Given the 49 percent rally seen from March lows, what is the market seeing? Or is it just a liquidity driven rally?
Normally markets tend to discount the earnings/growth six to twelve months in advance. We believe that current rally where Nifty has almost gained 50 percent from the March low is on the back of both - expectation of earnings and easy monitory policies by the Central bank of across the globe.
On the back of central bank's action - Not only India, markets across the globe are doing well. Asian Markets like Taiwan has trading at 52-week high while Nikkei and Korean markets are couple of percentage away from the all-time high. Even large markets like Dow Jones has risen more than 45 percent from the low and now only 10 percent off from the all-time high.
Moreover, the earnings declared so far have been positive, as the sectoral leaders, especially in the IT and Private banking sector, have declared better-than-expected in a quarter that was considered to be a muted, in terms of business.
Though for FY21 consensus earnings growth expectation is muted, for FY22, market is expecting humungous 40 percent growth in earnings.
Foreign institutional investors (FIIs) are net sellers of Indian shares worth Rs 22,000 crore in 2020 so far. However, domestic institutional investors including mutual funds and insurance companies are net buyers of equities worth Rs 85,000 crore in the 2020 so far. Both the FIIs and DIIs are net buyers since April to till now. Hopes of an early arrival of a vaccines has also boosted investor sentiments.
Q: Britannia numbers were very strong given the demand for biscuits during lockdown period and the stock reacted with 85 percent gains from its March lows. Your call on the FMCG space?
In the FMCG space, companies like Britannia and Hindustan Unilever (HUL) have so far reported good numbers beating estimates. Britannia and Nestle both have a portfolio skewed towards essential goods and a solid food and refreshments segment and hence are expected to be outliers in the sector, however, this seems to be priced in as valuations are outstretched. Companies with a strong home care and F&R (food & refreshments) portfolio are doing well.
Post the lifting of the lockdown, companies have seen pantry loading. While premium products are expected to take a hit. Britannia saw market share gains), however, the higher demand for biscuits does not seem sustainable in the longer term. Any price action from Parle to counter the loss of market share will be negative for the industry dominated by three players (Britannia, Parle, ITC). More so, F&R products are seeing increased demand due to lack of other options for outdoor eating. This demand is expected to normalize at some point of time as we see more relaxations in the economy.
Going forward, companies that are market leaders in home care and F&R segments are expected to do well in the shorter term. Most of the top players are cash-rich which means they can support distributors and offer better credit terms. This might also lead to some market share gains from smaller or unorganized players. ITC is the cheapest stock of the lot. It pays a high dividend and the management is trying to diversify the portfolio in order to rely lesser on the cigarettes business (heavily taxed). ITC is actively acquiring smaller players in the non-cigarettes categories to grow both organically and inorganically. However, this remains a long-term value story.
In alcohol beverages space, companies like United Spirits and United Breweries with a good premium portfolios will remain under pressure as down trading is expected in a sector that is facing increased tax burden from the government authorities. Whereas smaller players like Radico Khaitan can benefit due to a much larger popular segment portfolio.
Q: Given the stellar rally in benchmark/broader markets and across leading sectors, which sectors are worth looking at now?
From the bottom of March 2020, Sectors which have outperformed significantly are Auto (64 percent), Pharma (63 percent), Energy (59 percent), IT (57 percent) and Infra (52 percent). Major underperformers are PSU banks (21 percent), Reality (22 percent) and PSE (33 percent).
From outperformers, we believe that Pharma and IT would continue to do well in the coming months too and investors should look for an opportunity to accumulate the stocks at lower levels.
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.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
