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

Market shifts focus on 2H FY21; demand a worry, stay away from auto sector for now

Investors should wait and watch for some more time as there is still a lot not known to accurately predict what will happen next in the auto sector, says Prashanth Tapse of Mehta Equities.

Sunil Shankar Matkar

Companies and investors are largely writing off the entire first half of FY21 but as markets look forward to earnings, it's time to start looking towards the second half of the financial year, which looks better that first half as of now, Prashanth Tapse, AVP Research at Mehta Equities,  tells Moneycontrol's Sunil Shankar Matkar in an interview. Edited excerpts:

Q: The market rallied consistently for the third consecutive week on hopes of economic recovery as strict lockdowns are unlikely to be brought back, though coronavirus cases continue to rise. Is it the only reason behind the rally? Do you expect the rally to continue?

Despite COVID-19 severely hampering economic activity, markets consistently surged and rallied on the back of early hopes of COVID-19 vaccine boosting Indian investor sentiment and it was also backed by domestic liquidity, which continued to drive Indian equities in tandem with global markets. However, the rising virus infections in India continue to be a cause of worry as they have crossed the seven-lakh mark but the news stands encouraging on successful trials of a vaccine being developed for the virus.


Well, there is a total disconnect between rising markets and the deep mess in the real economy. To our mind, the street will keep on focusing on the good news and discounting the bad spike— hence expect Dalal Street to climb higher in the next week's trade too. Honestly speaking, common sense never ever could describe the market. But it makes all the sense of the financial world to play along with the rising trend of the market if you want to win some quick bucks. As they say, 'the trend is your friend'.

We, at Mehta Equities, advise investors to wait and watch out for any signs of trend reversal. From a chartist standpoint, happy days would continue here at Dalal Street as the technical landscape continues to be in optimistic mode, with all investors' eying Nifty 200-DMA at 10,891. Options data for July 3 also suggests trading range would be in between 10,200 and 10,900 levels for this month and expect investors to continue to bet on phase-wise economic recovery despite the worrying rise in new cases.

Q: Some experts feel the market is running ahead of fundamentals and despite expected weakness in earnings. Do you agree? Should one buy stocks now or wait for a correction?

Investors have been expecting a disaster in corporate earnings and, so far at least, we haven't got it so bad. Even management commentary gave the market a confident outlook to withstand businesses against the COVID spread and its impact. With unlocking formulas supporting phased re-opening of economic activity, markets started discounting the severity of impact of virus spread over businesses going forward. But it seems like more businesses are dealing with the coronavirus and markets are learning to live with it.

Yes, companies and investors are largely writing off the entire first half of FY21 but as markets look forward to earnings, it's time to start looking towards the second half of FY21, which looks better that first half of FY21, as of now. And we also believe government's Rs 20-lakh crore stimulus package was also much faster in giving liquidity support in this crisis which gave a breathing space for the economy to stabilise and reopen. Since investors expect some business is better than nothing, every rupee in sales is a positive investment surprise for markets, first seen in the auto industry riding out the COVID-19 crisis. Auto sales showed pick-up signs in rural India. Hence, we advise investors to focus and start accumulating phase wise in companies and industries that will manage and navigate the COVID downturn and emerge stronger.

Q: The technology index has outperformed benchmark indices in the last three weeks, though these companies are expected to report a 5-9 percent sequential decline in Q1 revenue. What is the reason behind it and should one buy these stocks now?

Technology is a sector which turned well in the pandemic scenario as the whole world is running on digital technology platforms. Industry data says spends on digital transformation will increase, offset by a lesser spend on operations and the cost saved will be invested back into digital transformation of business. Reacting to the fundamental development, the technology index outperformed well.

Point to note that the majority of the IT companies which get outsourcing business did not face significant cancellations or pricing pressure from global clientele. Work from Home (WFH) transition was smooth and had very little revenue impact. Industry leader Accenture's stronger-than-expected results and commentary set an encouraging tone for the impending earnings season for Indian IT. Hence, we continue to remain optimistic on Infosys and TCS with decent upside in line with index performance.

Even globally, high-flying technology companies have outshone the market. While the risk comes in as US President Donald Trump issued a proclamation to suspend issuing of H-1B visas and other foreign work visas for the rest of the year. The proclamation that came into effect from June 24 is expected to impact a large number of Indian IT professionals and several American and Indian companies who were issued H-1B visas by the US government for the fiscal year 2021 beginning October 1. As a result, IT counters can see it as a concern.

Q: The second tranche of Bharat Bond ETF will open for subscription on July 14. Should retail investors subscribe to the issue?

Bond market in India is still at a very nascent stage and whereas Bharat Bond ETF is essentially an exchange-traded fund that invests in AAA-rated bonds of public sector enterprises. The first tranche of the Bharat Bond ETF was launched in December 2019. The initial issue size of Rs 7,000 crore, which was oversubscribed nearly 1.8 times. The Bharat Bond ETF has a defined maturity date, so at maturity investors will get back the investment proceeds along with the returns.

We consider Bharat Bond ETF is an efficient debt product that provides easy access to retail investors in bond markets and adequate liquidity on exchange with low bid-ask spreads, which will eventually encourage investors to participate in developing bond markets further. These products are good investable products to consider if investors have an investment horizon matching the maturity dates of the ETF funds. But if one has a 6 to 12-month horizon period, these funds will not be suitable for a retail investor as returns will be volatile, depending on short-term interest rate movement.

Q: Aditya Birla Fashion and Retail's Rs 110-crore rights issue will open on July 8. Should investors participate in it?

After the successful execution of Reliance Industries' rights issue, Aditya Birla Fashion and Retail (ABFRL) looks to catch up with the same story with its own rights issue. ABFRL is the country’s largest apparel company with brands including Louis Phillippe, Van Heusen, Peter England and Pantaloons. The stock is trading at Rs 120, which is down by 57 percent from its 2020 peak of Rs 281.31 (February 24). The fall is due to its financial leverage concerns mingled with ongoing pandemic affecting the business earnings.

The rights issue is structured similarly to that of Reliance Industries where shareholders will have to make payments in three tranches. Initially, shareholders will have to pay 50 percent of the issue price—Rs 55 for a partly-paid share of face value Rs 5 each. The second and the third tranches will include payment of Rs 27.5 each in January 2021 and July 2021. The right entitlement ratio works out to nine partly paid-up shares for every 77 shares held on the record date.

We believe ABFRL's rights issue is well priced, considering the investor sentiment and ongoing pandemic environment. Investors who wish to go long along with the future prospects of ABFRL can consider subscribing to proceeds, which will be utilised to reduce debt acts right in the current business atmosphere.

Q: Most experts feel two-wheeler and tractors sales data in June was better and passenger vehicles and LCV sales data is expected to improve in the coming months. What is your take on the auto sector and should investors buy these stocks?

Industry data suggest that first signs of recovery have been seen in rural India, while urban areas are still being more impacted by COVID-19 and the lockdown. Auto manufacturers assume and expect the recovery trend to remain strong as inquiries and bookings are rising fast in the last one month.

With easing supply-chain blocks after unlock 1.0, a significant uptick has been seen compared to the previous month on improving rural demand and preference for personal vehicles amid the pandemic need. Industry data also says that 80-90 percent of production and auto dealers have resumed operations by the first week of June following Unlock 1.0, which brought back the uptick. In June, Maruti and Hyundai, commanding nearly 70 percent market share, reported more than three-time jump in June over May. But we do not expect the rising trend to continue in the coming months, as we believe this May-June jump was on the back of demand bottlenecks created amid the pandemic lockdown.

With COVID-19 not going away anytime soon and high fuel prices with lower business future, auto demand would be a concern for at least in H1FY21. In fact, with a strong culture of remote working growing out of this pandemic, the entire notion of a 'work-commute' might mean very little to a large section of car buyers. Hence, we advise investors to wait and watch for some more time as we find that there is too much still not known to accurately predict what will happen next.

Q7: Metals, pharma and realty stocks underperformed the market in the week gone by. What should be one's strategy with respect to these sectors?

Image1672020Overall, the Nifty50 rallied for the third consecutive week amid upbeat global cues, while the broader market took a breather as investors preferred to protect profits at higher levels. We still believe metals, pharma and realty sectors will trade volatile and underperform in tandem with global markets. Hence, we, at Mehta Equities, advise traders to wait and watch out for any signs of a trend reversal.

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 Jul 7, 2020 12:25 pm