Global firms such as Moody’s, S&P, Nomura, Goldman Sachs have slashed their GDP forecast for India for FY22 from their earlier projection due to the rise in COVID-19 infection and the resultant lockdowns which have impacted the business activity across sectors.
If GDP takes a hit due to lockdown in the second wave there is a strong possibility that the earnings of India Inc could see an impact sequentially, although on a year-on-year basis the earnings will look good due to base effect, suggest experts.
Rating agency Moody cut its GDP forecast to 9.3 percent from 13.7 percent earlier. “A high debt burden and a weak financial system remain the primary obstacles to economic growth, with risks being exacerbated by the coronavirus pandemic,” it said.
The latest cut in projections comes in the wake of a severe health crisis nationwide brought on by the second wave of the pandemic. India reported more than 4 lakh cases on daily basis last week.
“Going forward June quarter will surely see the impact on earnings on a sequential basis. However, on year-on-year basis, earnings growth will still be material because we had complete lockdown in Q1 FY21 and we have a favourable base effect,” Rusmik Oza, Executive Vice President, Head of Fundamental Research at Kotak Securities said.
“The last two quarters saw consistent earnings upgrades which will halt as of now and we could see earnings downgrades after June quarter results. The real threat to earnings could emerge if COVID situation persists longer and drags into Q2 and if there is a possible third wave,” he cautioned.
Oza further added that we have not seen much impact of higher raw material cost in Q4 FY21 numbers but going forward. it will be visible in Q1 & Q2 numbers of FY22.
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We are in the middle of the March quarter earnings and so far corporate quarterly scorecard data indicated that the Q4 has maintained its momentum, but the management commentary hints at caution.
Most states including Delhi, Maharashtra and Karnataka have extended their lockdown that could hurt business as most shops remain shut. A rise in commodity prices, as well as a fall in demand, will hurt the earnings of India Inc in the June quarter.
“Large part of the Indian geography is locked down for about a month now. If we assume one more month lockdown, that will be 2 out of 12 months which is an impact of 16%,” Kunj Bansal, CIO, Karvy Capital said.
“One can assume that about half of the lost sales will get recovered in pent-up demand. Resultantly, earnings can be lower by 8% from the originally expected growth in the affected sectors,” he added.
Where are pockets of opportunities?
We are in the middle of a lockdown and most of the business centres are shut although the lockdown is not nationwide unlike what we saw last year.
The second corona wave is affecting sales of automobiles, consumer durables, cement, and real estate. Vaccination drive is underway and total cases are coming down from 4 lakh which is a positive sign that should support investor sentiment.
The risk-reward will be favorable in sectors that are affected by the second wave and could see a bounce back as things return to normalcy, suggest experts.
Rusmik Oza, Executive Vice President, Head of Fundamental Research at Kotak Securities
Investors need to segregate the near-term and long-term impact of COVID and position their portfolios accordingly. Export-driven sectors or companies could turn out to be evergreen plays that may do well in both COVID and post COVID scenarios.
We expect sectors like IT Services, Pharma, Specialty Chemicals, Agro Chemicals, Insurance, Metals, Tractors, and Telecom to remain resilient in the near future as well as long term.
Economy and service-driven sectors like automobiles, retailing, aviation, hotels, banks, infrastructure, construction, NBFCs, and capital goods could be the worst impacted due to the ongoing second wave.
From a short-term point of view, if investors wish to protect their gains and invested capital then they may have retain exposure to defensive sectors like IT, Pharma, and FMCG.
We recommend investors view the ongoing correction in economy-driven sectors as a good buying opportunity and increase their exposure at every decline.
HSBC Global Research:
HSBC in an Indian Equity Strategy note last week said that it prefers defensive underperformers of last year, disrupted long-term plays, and COVID-19 beneficiaries to navigate this phase.
It like four categories of players: 1) underperformers of last year, which offer defensiveness and resilient earnings outlook; 2) disrupted by COVID-19, at an attractive valuation, offer long-term attractiveness and favourable risk-reward; 3) COVID-19 beneficiaries due to consumer preferences or changes in industry structures; 4) structural winners which may see some correction in this short term vulnerability phase.
Kunj Bansal, CIO, Karvy Capital
The second corona wave is affecting sales of automobiles, consumer durables, cement, and real estate. In turn, this will have some impact on raw material suppliers to these sectors.
Prices of stocks from some of these sectors such as Auto and Cement have already witnessed correction. One can be ready to take exposure in these sectors on any correction in the market.
Additionally, one can look at buying quality businesses from BFSI and pharma sectors.
Disclaimer: The views and investment tips expressed by the expert on Moneycontrol.com are his own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
