Neeraj Chadawar, Head, Quantitative Equity Research, Axis Securities, says the second wave of coronavirus is leading to a slow shift towards defensives and selective cyclical plays but as the restrictions are not as tight as in 2020, some pockets of the economy will continue to do well.
The market will remain rangebound but it is a chance to accumulate quality stocks that can generate healthy long-term returns, says Chadawar who has cut the December 2021 Nifty target to 16,100.
In an interview to Moneycontrol’s Sunil Shankar Matkar, Chadawar says the record rise in infections and the restrictions imposed by states will see a few sectors underperform in the near to medium term, while the other few will outperform. Edited excerpts:
What is your take on the banking and financials segment after the RBI announced several liquidity measures to support the economy and business hit by the second COVID-19 wave?
RBI’s announced measures are the continuation of the initiatives that the central bank proactively responded to mitigate financial distress from the COVID-19 pandemic. Announced measures largely addressed the need of the small borrowers, individuals as well as the businesses and the MSME space who have been amongst the worst affected in the second wave of COVID-19.
Besides liquidity measures, easing lending to the above strata by extension of restructuring and boosting medical infrastructure through priority sector lending recognition will help bring relief in the financial ecosystem. While no blanket moratorium was announced, we believe these could be among the early measures announced as the macro-economic conditions evolve.
The market has remained rangebound for almost three months. What should be the strategy? Is it still a buy-on-dip market?
The Indian market was largely rangebound and more volatile for the last couple of months, initially on account of weaker global cues of rising bond yields on the anticipation of higher inflation and later due to the rising concern over the second wave in India. April was a challenging month, we are still not out of the woods. The daily COVID-19 cases have sprung out of control crossing 4 lakh cases on April 30, the highest in the world. Fatalities have also increased at an alarming pace and pressure on the healthcare system has never been this high.
Various states have announced lockdown measures to break the chain. The vaccination drive has not taken off for the 18-44 years old category as the shortage of vaccinations continues to be a major challenge. As we study the COVID-19 curve, challenges will continue to persist and faster vaccination is the only permanent solution. In our opinion, vaccinating a significant part of the population will take at least six months.
While there have been significant challenges, the economic impact remains uncertain at this juncture. Even as there will be some demand loss, our experience indicates that not all demand is lost and it is more likely to resume rather quickly. Also, this time the challenging time frame seems to be finite, which is keeping the market rangebound.
In the current setup, this is a buy-on-dip market, as the second wave in India has still not peaked. Fear of downgrades of FY22 earnings is back in our expectation. The longer the duration of the localised lockdowns, the higher the downgrades on FY22 expectation. The market is closely watching the COVID curve, once the curve heads south, the market will gain more clarity on the damage and based on the damage, the market will gain further strength. Till that time, the market will likely be rangebound and volatile.
However, the market will react if the government announces a nationwide lockdown, an important factor will be the duration of the lockdown, the longer the duration, the greater will be the short-term pain.
India has been reporting record high daily cases and experts say it may be several weeks before the situation improves. Are you worried about your portfolio and do you think it is COVID-proof?
Market positioning is slowly shifting towards defensive and selective cyclical plays. Concerns due to lockdown-led restrictions are clearly visible in interest rate-sensitive sectors. This time restrictions are not as strict as the last year. Hence, certain pockets of economy will continue to do well. The sector rotation theme will likely play out in the near term. BFSI, discretionary consumption and autos will bear the brunt of the impact and may underperform in the near term due to the challenging economic environment.
Which are the COVID-proof sectors that one should consider for investment?
IT, telecom, pharma, consumer staples and rural themes will be less impacted and continue to attract allocation in the near term. Along with these defensive themes, metals, commodities and other cyclicals are well placed in the current environment. Metal prices have continued to rise even during the second wave of the pandemic globally. Similarly, other commodities have also continued to rise. Even though cyclical plays such as cement and capital goods may see some disruption in demand intermittently, the demand surge post the pandemic is very likely. Thus, cyclical space is well placed to outperform during these challenges. Correction in cement stocks and others should be used to accumulate.
What is your take on the March quarter earnings—the hits and the misses?
We are in the middle of the quarterly earnings season. So far, Q4 results are largely in line with the expectation. Cyclical sectors such as metals and cement posted strong results led by stronger demand and uptrend in realisations. Large IT companies continued with the growth momentum in Q4, led by strong deal closures and the inline performance on the margin front. FY22 double-digit guidance by all the large IT companies is further positive for the sustenance of the rally. FMCG numbers, so far, are largely in line with expectations, however, gross margin pressure was clearly visible due to raw material headwinds.
Further, Maruti disappointed on the margin front led by higher input cost. Even with the largely in-line results, the upgrade momentum of the last two quarters has taken a pause, so far, in Q4 earnings due to the risk of some demand loss on account of a sharp surge in the second wave. However, the downside risk is back in our expectations, with upgrades likely to be on the sidelines at least for a couple of months till the time we have clarity on the peak of the second wave.
Rating agencies and experts have lowered the economic growth target for FY22, citing the fast-rising COVID-19 infections. What are your growth expectations and have you lowered the FY22 target?
In our COVID 2.0 report, we had cut FY22 earnings by 6 percent in our base case scenario to 650 for NIFTY50. Based on the sensitivity analysis of the virus spread and the duration of lockdown, we estimate the FY22 earnings for Nifty50 to decline by 6 percent to 16 percent in the base to the bearish case scenario. Considering a strong run in commodity prices and an improving global situation, the Nifty50 is unlikely to see any major downgrades in the near term.
The market will remain rangebound but it does offer good opportunities across the spectrum of sectors to add quality stocks that can generate excellent long-term returns. While this is not a doomsday scenario, it does indicate that a few sectors will underperform in the near to medium term, while the other few will outperform. Accounting for all these factors, we cut our December 2021 Nifty50 target by 6 percent to 16,100.
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