Indian market wrapped up volatile and unpredictable 2020 on a strong note with gains of about 15 percent each on benchmark indices while the small & midcaps outperformed.
Top performers of 2020 in terms of sectors could still retain the baton for 2021, suggest experts. IT and Pharma/Healthcare topped the charts with gains of over 50 percent each.
The Banking index, which was an underperformer could bounce back in 2021 as the economy is showing green shoots. The outbreak of COVID-19 has led to structural changes that could have a long-lasting impact on sectors like commercial real estate, hospitality, automobiles, banking, energy, pharmaceuticals, IT services, and telecom.
"In our opinion, IT and Pharma should continue to show good earnings traction for the next couple of quarters at least. Banks/NBFCs should outperform as the economy revives. Other sectors which look interesting are Infrastructure, Real-estate, Auto and Commodities," Prasanna Pathak, Head of Equity & Fund Manager Taurus Mutual Fund told Moneycontrol.
Experts advise investors to stay in sectors that are likely to get benefit from the change in trend, government policies, and revival in the economy.
Here is a list of top 10 sectors by different experts/brokerages that are likely to hog the limelight in 2021:
Expert: S Naren, ED & CIO at ICICI Pru MF at ICICI Prudential Mutual Fund
The relaxation of lockdown measures has improved power demand and capacity utilization at plants has also seen improvement. This may help in improving the margins of power generation companies in the quarters ahead.
Tariff hikes in the future look likely. This could be either regulator-driven or market-driven in order to improve the Average Revenue per User (ARPUs) and the financial health of the industry.
Higher Data usage post-Covid-19 and Fibre-to-the-Home (FTTH) and Enterprise connectivity businesses, which are still at a nascent stage, could become the new growth engines.
With the consolidation of India’s Telecom industry largely complete, the wireless industry’s revenue is expected to double to ~INR 2,600bn by FY25E.
Metals & Mining:
For nearly a decade, metals have witnessed weak demand. Apart from this, weak global prices, the restrictive regulatory environment has resulted in weak earnings and stretched balance sheets.
This coupled with an easy monetary policy stance of Central Banks may create the base for the next commodity up-cycle in India.
Brokerage: Reliance Securities
Financials (Private Banks & HFCs):
The financial sector has witnessed a sharp rebound in the last two months on the back of improved collection efficiency, emerging clarity over favourable credit cost, healthy capital ratio following a series of fundraising programmes, and higher provisioning coverage ratio, etc.
A possible improvement in the credit cycle will aid the banks to witness sound earnings growth, which might also get a boost with acceleration in asset resolution programmes under the Insolvency and Bankruptcy Code (IBC).
Additionally, visible improvement in the real estate scenario is likely to aid the housing finance companies (HFCs). Further, the subdued interest rate scenario has also brought the euphoria back to the real estate sector, which should translate into decent near-term disbursements for the HFCs.
Reliance Securities is of the view that several large private banks have witnessed a sharp rebound post their 2QFY21 earnings and their valuation appears to be rich, while many small private banks are still trading below their average multiples despite enjoying a healthy outlook on the earnings front.Automobiles:
The automobile companies witnessed a remarkable improvement in their respective volume during the last three months led by pent-up and festive demand. Further, the importance of personal mobility owing to social distancing need also aided their volume.
While healthy traction was witnessed in 2W, PV, and Tractor segments in 2HCY20. The brokerage firm expects a decent rebound in CV, 3W and export volume in 2021. Further, the need of personal mobility, likely new job creation, and persistent improvement in the rural economy aided by favourable monsoon and government’s policies should continue to lend support to the automobile companies on the volume front.
Further, the valuation of auto companies – which continues to remain below their respective peak – offers comfort.
Reliance Securities believes that the companies like Bajaj Auto, M&M (possible valuation rerating led by clarity over efficient capital employment), Bharat Forge (led by revival in domestic as well as overseas HCV volume), and Ashok Leyland (led by likely pick-up in CV sales volume and possible vehicle scrappage policy) should continue to get traction in 2021.
After a muted performance for the last four years, the pharmaceutical sector emerged as a winner during the pandemic and proved to be saviour for the investors with a substantial return in 2020.
While a number of factors including incremental API opportunities played a vital role in emboldening the investors’ confidence, we believe the sector should continue to remain in focus in 2021 as well mainly on the back of: (1) least scope for pricing pressure, as National Pharmaceutical Pricing policy has already covered a large number of molecules; (2) unlikelihood of further price cut for Indian generic products, as a generic business (USA export) appears to have stabilized after pricing pressure for last 4-5 years.
There would be a minimal impact of any adverse outcome of the US FDA, as a large number of companies have automated their production capability and fairly diversified their production base in the last five years.There is a sizeable opportunity for the listed pharmaceutical companies on the back of the COVID-19 vaccination process; and inexpensive valuation, as the industry is still at a discount of >30% compared to the last up-cyle.
Additionally, ongoing traction in the real estate sector – primarily led by lower interest rate scenario, the stamp duty cut by various state governments, discounts, and various sops offered by the developers – is expected to sustain in 2021 as well.
The real estate sector has been witnessing consolidation or joint developments especially after the implementation of RERA and the liquidity crisis faced by several unorganized real estate companies.
Brokerage Firm: ICICdirect
Globally MMF is the dominant fiber, while India’s exports are skewed in favour of cotton-based textiles with share of cotton-based textile exports at ~2x to MMF-based textiles.
To capture the global export opportunity in MMF, the Government of India has allocated Rs 10683 crore to support manmade fiber (MMF) and technical textiles over the next five years through production linked incentive scheme (PLI).
Polyester is becoming a preferred fiber given its unique characteristics and inherent limitations of the growth of cotton fiber.
The PLI scheme aims to enhance capabilities of the Indian MMF sector and improve global competitiveness to garner a higher share of the global MMF trade. Key beneficiaries include Gokaldas Exports, Siyaram Silk Mills, Filatex India, and Arvind Ltd.Specialty steel:
Over the years, domestic steel companies have been focused towards import substitution as well as export promotion. The extension of the PLI scheme to speciality steel gives a further push to this objective.
Within this scheme, there is a financial outlay of Rs 6322 crore that has been approved for five years. Under this PLI scheme, coated products, high strength steel, steel rails and alloy steel bars and rods are included.
Going forward, this scheme would also aid domestic companies in enhancing their manufacturing capabilities and developing new products to promote import substitution as well as enhance exports.
Specialty steel, a part of value-added steel, finds applications in key areas within automobiles, railways, etc. This is by virtue of having a critical application, value-added product yields, higher EBITDA/tonne for steel companies vis-à-vis basic commodity grade.
Hence, having a higher proportion of value-added share aids in lending stability to overall operating margins. Currently, for JSW Steel, value-added, special products account for ~51% of overall sales while for Tata Steel value-added, special products account for ~43% of overall sales (domestic segment for both companies).
Extension of PLI scheme to specialty steel segment would give a push for domestic steel companies to increase the share of value-added products in overall product mix thereby improving their earnings profile.
Rising adoption of smartphones, high internet speed and social distancing (due to COVID-19) has changed consumer behaviour. Consumers now prefer to transact (buy a product) virtually over the smartphone via an app instead of physical transaction.
This has led to a proliferation of new-age technologies (expected to grow at a CAGR of 16% in FY21E-25E) and is set to be the beginning of a multi-year technology transformation phase.
In the first phase, enterprises are building a cloud-based foundation (expected to grow at a CAGR of 15-20% in FY21E-25E). In the second phase, there will be growth in ancillary technologies like AI, robotics, IOT and 5G (expected to grow at a CAGR of 35-45% in FY21E-25E).
The key beneficiaries of this theme include HCL Technologies (which has a higher share of revenues from infrastructure led Cloud based services) and Tech Mahindra (which generates ~40% of revenues from communication segment and an ideal play on 5G technologies).
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