Moneycontrol Readers' Survey: Technology, pharma to dominate post-COVID world; will financials lose their clout completely?

The technology sector is likely to dominate the market in the post-COVID era, according to a social media poll conducted by Moneycontrol.

In a poll on Twitter, a majority of respondents said that the technology sector will dominate the market after the coronavirus pandemic is over.

The financial sector, which has been a leader of the market, may see an erosion in their dominance as after the technology, pharma will be the second dominating sector in the post-COVID era.

When will the COVID-19 pandemic end is not the only most sought-after question at this juncture, but how different the world will be after the pandemic is also something that analysts, experts and even common people are trying to visualise.

This is a serious and unprecedented disruption that is likely to trigger socio-economic and behavioural changes, experts say. Even though the magnitude of change cannot be ascertained at this point in time, COVID-19 will surely be mentioned on the timeline for a pre and post-COVID world in many spheres of life.

The market will see a change in leadership after the pandemic is over, experts say.

Why can IT, pharma dominate?

Experts are of the view that the financial sector, at this juncture, is surrounded by too many uncertainties which could result in its underperformance for the next two quarters.

On the other hand, technology and pharma sectors are viewed as defensives in these uncertain times. Since Nifty50 is trading at rich valuations, there is a high probability of a correction in it and both, technology and pharma, could outperform the Nifty in any meaningful correction in the future.

Naveen Kulkarni, Chief Investment Officer of Axis Securities is of the view that IT and pharmaceutical sectors are clearly dominating now and will continue to dominate on account of their inherent strength.

"Q1 FY21 earnings of the IT sector so far have significantly beaten expectations and the sector has seen earnings upgrades. The sector is in a re-rating cycle and this trend is likely to persist over the medium-term," Kulkarni said.

"The information technology space is marked by companies with strong balance sheets and plays on the current trend of digitization. Even at current levels, the IT sector valuations are reasonable. We recommend an overweight stance on the sector," he added.

The pharma sector has witnessed a surge in demand in the COVID environment and there have been many structural changes like supply chain realignment.

"This led to an overall re-rating of the sector which had been under pressure for the last couple of years because of FDA issues and pricing environment in the US generics markets. While the challenges are significant for the sector but there is value in the sector and many stocks offer solid growth potential. We believe the re-rating is likely to sustain over the medium-term, and hence we recommend an overweight stance on the sector," Kulkarni said.

Rusmik Oza, Executive Vice President and Head of Fundamental Research at Kotak Securities highlighted that the COVID-led disruption has forced digital acceleration and led to companies investing in and pursuing digitalisation at scale. IT companies have been able to save on travel-related costs. Attrition rates have also come off due to work from home.

"As against the upwards revision in future earnings estimates of nearly 8-10 percent, the stock prices have moved up on an average by nearly 30 percent (except for TCS) in the last three months. Most technology stocks are trading closer to their peak valuations leaving little room for further re-rating," Oza said.

"Due to higher dividend payouts, the RoEs of frontline IT companies averages nearly 23-25 percent which should allow them to trade at higher valuations. IT would be one of the few sectors that would report positive earnings in FY21 which will make it one a prime defensive play in this market. Going forward, the IT sector may not deliver great absolute returns but on a relative basis, it would outperform manufacturing and domestic-oriented companies," Oza added.

In Oza's views, similar to the technology sector, the pharma sector could be viewed as an ideal defensive sector and could fall lesser than the market in any future correction. On a relative basis, the pharma sector could outperform the Index and other sectors, he said.

Will financials lose their clout completely?

There is a lot to handle for financials. While the COVID-19 has aggravated the risk of NPAs, the loan growth and deposit growth have been hit due to job losses and pay cuts.

The extension of moratorium and uncertainty related to the potential rise in NPAs has led to sharp underperformance of the BFSI sector as compared to the Nifty-50.

"We also observe that the sector is not focused on growth but managing its balance sheet challenges. While the valuations in the sector are reasonable we believe that the sector may not outperform the benchmark over the medium-term," Kulkarni said.

However, everything is not lost for the sector. The headwinds for the sector are for the short-term and in the long-term, this sector may bounce back strongly.

Oza of Kotak Securities is positive on the financial stocks from a 2 year perspective as upside in most of them is quite decent from current levels.

Oza is of the view that the steep underperformance of financials and attractive valuations on price/book value basis makes them more attractive from a two-year perspective.

In the recent Financial Stability report, RBI data indicates GNPLs rising from 8.5 percent in FY20 to 12.5 percent in FY21 under the baseline scenario. Most top tier banks are raising equity and also providing for post COVID scenario NPAs in advance. The Provision coverage ratio of most top tier private sector banks has improved which is a good indicator.

"NII growth of the top tier private sector banks in Q1FY21 has ranged between 16-20 percent, which provides some buffer for full-year numbers. Recent Q1FY21 results show private sector banks are better placed than the PSU banks and NBFCs. The private sector banks on an average are trading at nearly 2 times FY21 Price/BV and 1.7 times FY22E Price/BV," Oza said.

"The average valuations of NBFCs has fallen closer to those of banks except for names like Bajaj Finance and HDFC Ltd. Our preference in financials would be towards the larger private sector banks like ICICI Bank, Axis Bank and SBI followed by some of the smaller banks like Federal Bank and DCB Bank. In the case of NBFCs, one needs to be very selective and remain focused mainly on the larger names," Oza added.