Last Updated : Apr 17, 2020 02:21 PM IST | Source:

'We advise deploying 5% capital every week and stopping around 40% of portfolio'

Since agriculture is an essential service, the rural economy is faring relatively well, with a turnaround expected in two wheelers and tractors.

Sunil Shankar Matkar
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We recommend investors to start buying in a staggered manner, focusing on robust companies with a high return on capital, proven track record and ability to withstand the current turmoil, Vinay Khattar, Head – Research at Edelweiss Wealth Management said in an interview to Moneycontrol's Sunil Shankar Matkar.

Edited excerpt:

Q: Do you think the market has bottomed out? What are your thoughts and what are the reasons behind the recent rally?


The Indian stock markets have been through four bear markets in the past 25 years, including one that is ongoing. Each of the past bear markets witnessed sharp bear market pullbacks of 50 percent, 28 percent and 25 percent each. It is our belief that the current rally is a similar pullback.

The monetary policy action by the RBI has been much needed and is heartening. With a steep 75 bps cut in repo rate and other measures, we believe that the RBI is headed in the right direction. However, in our view, to revive the economy and markets, we need a stronger catalyst. The fiscal measures announced are a good start but are unlikely to move the needle. More will need to be done to combat the repercussions of the COVID-19 lockdown. While India has taken a remarkable step towards curbing the current pandemic, with the nation-wide lockdown, significant timely and targeted policy actions will be further needed.

Q: FIIs also turned back to India after more than Rs 65,000 crore of selling in March alone. Does it indicate that FII believes in India's economic growth potential once this crisis is over?

Firstly, with the preemptive lockdown, India largely has the COVID pandemic under control. There is a floating narrative that India could be the next production powerhouse as global demand wanes away from China. Also, at least in terms of numbers, India's growth numbers will look much better than those of developed economies, post this crisis. Thus, India is expected to fare relatively better.

Secondly, valuations are cheap. At 7,500, Nifty's forward and trailing PEs were trading below 15X. Our valuation tracker shows that even in the broader market, value has emerged across sectors, comparable to the 2009 levels.

Q: What should investors do now and what are you suggesting to your clients nowadays?

We stand at a unique juncture of a novel crisis when economic activity, other than the essentials, is at a standstill. At this crucial point, policy will play a very important role in defining the future. This crisis would ebb with some clarity on the clampdown of the outbreak, but investors would benefit if they make a valuation call at this juncture.

The sticky P/E of Nifty has been washed away in what can be considered as probably, the fastest decline in valuations, from near 25x TTM to sub-17.5x. With FY20E EPS at 520, we currently stand at P/E levels of 16x on TTM basis. Historically, we have seen that returns are significantly higher when markets are undervalued, especially lower than 17X on trailing basis. Our call is that at this point, markets are undoubtedly cheap for long-term investors.

We recommend investors to start buying in a staggered manner, focusing on robust companies with high return on capital, proven track record and ability to withstand the current turmoil. Better still, is to buy diversified portfolios. We are advising investors to deploy 5 percent of their investible capital every week, stopping close to 40 percent of the portfolio.

Q: What are the sectors that still look attractive for buying?

We continue to be bullish on consumer staples, pharma, select consumption and banking stocks. The flight to safety in these volatile times and relative resilience amid the lockdown, pose a lucrative opportunity for consumer staples and pharma sectors currently.

Among pharma stocks, we are bullish on Ajanta Pharma, Abbott and Dr Reddy's Labs, while in consumer staples, we prefer HUL and Dabur. Besides these, post the current correction, select consumption and banking stocks have become very attractive and are trading at lucrative valuations. Our top picks in the banking space would be ICICI Bank, HDFC Bank and Axis Bank whereas in consumption, we would prefer Trent, Bata and Astral Poly Technik.

Q: Some investors feel the new infections and deaths count for each day globally may be at a peak now. What are your thoughts and is it the real reason behind this week's rally?

We are closely watching developments closely and we will be relaxed when new recoveries, stand at least at 50 percent of new cases and stay sustained. However, green shoots are visible. Despite the total tests across the globe increasing to 2 million+, incremental cases are declining. New cases have seemed to peak around April 4, when we added approximately 1 lakh cases in a day. The numbers since then, have remained below this high. India is now doubling its active cases every 7 days, from doubling every 4 days at the end of March.

These green shoots cannot be ignored but we are waiting for a more definitive sign in incremental recoveries, like what has happened in Italy. Markets are watching the pandemic closely and any signs of stabilization, will lead to recovery.

Q: Every major correction in history created new opportunities (which could be niche, unlisted or unknown) for investment. In COVID-19-led crisis, what could be those new opportunities which can investors think for investment?

This crisis is different in many ways. It did not start from a financial collapse but emerged because of economic activity shutting down and being reflected in financial markets. Therefore, the turnaround of this 'Black Swan', can be very different and unpredictable, owing to several unknown variables.

Our sense is that once recovery sets in, it is more likely to be V-shaped. Consumerism will reflect in about two quarters after the lockdown while technology could see a further push too, with Work from Home modules, becoming more common. Since agriculture is an essential service, the rural economy is faring relatively well, with a turnaround expected in two wheelers and tractors.

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First Published on Apr 17, 2020 02:21 pm