Last Updated : Oct 26, 2020 06:10 PM IST | Source: Moneycontrol.com

'Market in a mild correction phase due to the quick bounce'

Though the Indian economy is expected to contract, green shoots are visible across segments like affordable housing, agriculture equipment and consumer products.

Vinod Nair

Most of the results from bluechip and largecaps, including IT, finance and FMCG firms, have had a positive effect on the market. IT companies and banks announced better-than-expected financials and their outlook improved due to better guidance and management commentary. FMCG companies' results are in-line with estimates. Overall, Q2 results are marginally above estimates and outlook has improved with buoyant statements, leading to an upgrade in earnings, rating and price target.

Many top IT companies have announced the results, showcasing good dollar revenue growth on a sequential basis, in a range of 3-7 percent. Good deal wins during the year have benefitted revenue growth and the track record of deal wins continues, improving the outlook further.

Operational improvements and work-from-home have helped companies to post decent margins during the quarter. Pandemic has improved the outlook for IT, especially for largecaps, with increasing demand for quality digital services. Midcap players are still facing headwinds with weak demand, muted revenue growth and client-specific issues, which can be resolved post the pandemic.

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With Q3 generally a weak quarter for IT sector, we should be watchful as valuations are more than 10-year historical highs. But at the same time, the downside in stock prices will be protected, in the near-term, due to buy-back plans and improvement in outlook. The improvement in demand and sustainability of re-rating is likely to stay in the long-term due to good traction in key verticals.

Other sectors that have announced results are from FMCG and finance space. FMCG results came in a tad above estimates. Overall business is stable due to strong growth in staples but decline was seen in personal and discretionary items. The outlook for non-staple and consumer discretionary is improving and the stagnation is expected to reverse due to pent-up demand in the coming quarters.

Financials sector results beat forecasts by a thin margin. On the operational front, collections, advances and net interest income improved. Due to a standstill in asset classification, awaiting the Supreme Court order, banks did not report fresh slippages for the quarter. However, provisioning was done estimating a rise in slippages in the future. The focus will be on the restructuring of advances and growth in new business. The outlook for banks is improving which will lead to re-rate in stocks and sector.

Other than Q2 results, the factors that helped the market is the expectation of a further fiscal stimulus. The government is working on a package but the size is expected to be low due to the below-par pre-festival package announced recently.

The fall in daily coronavirus infections and a drop in death rate has helped the market too. The declining mortality rate has reduced the anxiety of households and industry. Further opening up of the economy along with the accruing benefits of stimulus packages can have a positive impact on the economy.

So far, quarterly results have been good and have had a positive effect on the market. The only concern is that a lot will depend on the continuity of the positive Q2 results and expanding the breadth of the market.

Currently, a lot seems to be factored into the price of sectors like IT, FMCG, pharma and telecom and profit-booking is being seen in these sectors after the recent rally.

The market's confidence is based on a turnaround in Q2 results but the buoyancy must continue in other sectors and midcaps, too, or the trend will slow down. The Western markets are also fading due to a lack of consensus in the US on a fiscal package before the elections and no hope of talks between EU-UK. Volatility is expected but the market will maintain its optimism in-line with stock-wise Q2 results.

Though the Indian economy is expected to contract, as per IMF's latest forecasts, green shoots are visible across segments such as affordable housing, agriculture equipment and consumer products.

We believe that the market is in a mild correction phase due to the quick bounce in the market. It has brought some volatility, which may stay for some more time. For the Nifty, a strong support is at 11,650-11,500, which should limit the downside.

The market is looking forward with high hopes to continuity in positive Q2 results, a bounce in midcaps, an end to the loan moratorium saga, a stimulus plan for India and the US election outcome.

(Vinod Nair, Head of Research at Geojit Financial Services.)

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First Published on Oct 26, 2020 06:10 pm
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