'Stick to sector leaders, these 4 sectors may see may see healthy earnings despite COVID-19 crisis'

We expect stronger names to bounce back equally, once the dust settles. We are playing on the theme of 'stronger will gain more strength', Kedar S Kadam, DGM & Head of Research at Cholamandalam Securities said in an interview to Moneycontrol's Sunil Shankar Matkar.

edited excerpts:

Q) Experts have suggested that COVID-19 will not have much impact on Q4 earnings, but FY21 will be hit considerably. What is your opinion? What about FY 22?

A) Honestly, we are not really impressed with the quality of earnings delivered in the last few quarters. The earnings growth was largely aided by the tax cuts and low base of the prior year. In my view on a normal scale, the overall earnings growth in real terms during the first 9 months of FY20 was largely muted, only a handful of stocks generated alpha for distinct reasons.

For Q4FY 2020, across the board, we expect the earnings to be much lower than what the street is estimating. The bounce in consumer sentiment and economic recovery was short-lived as indicated by the industrial numbers and other economic data in following months post the festive season. To conclude its better to not expect any growth in Q4FY20 earnings, even if we managed to hold previous levels which in our opinion will be good enough.

In our view, if the disease spread gets contained in Q1FY21, there could be significant damage in the quarterly earnings but it will give us some hope for Q2FY20, though we do not expect any immediate fireworks.

Kedar Kadam

DGM & Head of Research|Cholamandalam Securities

From the second half of FY21, we see earnings returning to the table. I would like to reiterate that this time it will be more company-specific than the overall sectoral uptick. We think the current COVID-19; crisis is going to change a lot of earnings dynamics and overall playing field.

For FY22, I would not really focus on lower base/ growth, but quality and ability to retain the earnings. We expect a gradual recovery in earnings for companies; however, the focus will remain on companies that will effectively manage the volatility in the next two quarters.

Q) Which sectors do you think can ride the COVID-19 blues?

A) As the economy goes through the turbulent times, there are little space to ride the tide. However, we can identify the places to avoid. These include Auto, Midcap banks, real estate & infra, Midcap IT. We expect earnings compression in these sectors.

We can see better/ sustain earnings momentum for FMCG & Consumer, Pharma and Cement. Here again,I would like to reiterate that even among weak sectors there will be companies that will outperform. So I suggest focusing on companies alongside sectors. The playing field is set to change in coming quarters.

Q) Pharma saw a sharp run-up last week. Do you think it has more steam left?

A) We do not have active coverage on pharma sector as of now. Personally, I believe the pharma sector has already gone through a lot of pain over the last few years bringing valuations at multi-year lows. During the current crisis, it remained resilient as business was better than usual. In our view, the pharma business is much more beyond HCQ, and hence will give this a pass.

Q) The market recovered more than 21 percent from March 23 lows. FIIs also returned in April. Based on this, do you think the market has bottomed out?

A) On a lighter note, I will not really look at the market ups & down at this point of time, which is offering plenty of opportunities for traders to make money on either side, the volatility is expected to continue.

From a portfolio or investment perspective, I will keenly watch the number for COVID cases globally and locally, which is likely to set the market tone for the next few quarters to come. Given current trading multiples, we expect the markets to find bottom nearby, however, the containment of the disease is key. If we find an immediate solution, everything will seem cheaper & vice versa.

In order to ride the current volatility, we have recommended investors to accumulate quality stocks in small quantities on each decline. Though bottom remains unknown, the risk-reward seems favourable.

Q: What are your thoughts on MID and smallcaps?

A) Given the current economic challenges, we believe select largecaps will lead the recovery; broader market will likely to underperform in the medium term.

Q: What is you advise to clients? What are those sectors one should look at and avoid, why?

A) The market fall was so sharp and broadbased which left little room to time the exit. However, we expect the stronger names to bounce back equally, once the dust settles. We are playing on theme of 'stronger will gain more strength'. We are advising our clients to stick with market leaders irrespective of sectors and focus on companies with strong balance sheets, management & performance track record. We expect a significant change in playing field across sectors, which IS crowded by a number of players.

For the next 12 months, we will focus on stocks and their relative strength irrespective of sectors.