Continues strength in the rural economy on the back of a good monsoon along with pent up demand bodes well for Agrochemicals, two-wheelers, and tractors.
While we continue to remain positive on the rural, essential and digital themes which have played out along expected lines since the beginning of the crisis we believe that there are is a clear case for further upsides in most sectors given revenue visibility and strong growth prospects, Jyoti Roy, DVP- Equity Strategist, Angel Broking, said in an interview with Moneycontrol’s Kshitij Anand.
Edited excerpts:
Q) What are your views on the outcome of the GST meeting, and will it impact markets?
A) The GST meeting largely revolved around how to meet the shortfall in state GST collections. As per the GST act, the center is supposed to meet the state’s revenue shortfall from the GST compensation cess that it collects on items like Tobacco, Automobiles etc.The center had put forward two proposals under which states will have to borrow in order to make up for the shortfall in revenue.
Under the first proposal, states could borrow Rs. 97,000cr from the RBI which will be paid back by from the GST compensation cess fund post-June 2022.
An additional 0.5 percent relaxation will also be provided to the states under the FRBM act which would be separate from the earlier 2%percent additional borrowing limit provided to states and were linked to states carrying out structural reforms.
The second option was that states borrow the entire projected shortfall of Rs 2.35 lakh crore which would be facilitated by the RBI.
However, most non-BJP ruled states have either rejected or expected to reject the center’s proposal and the issue is likely to continue for some time. We believe that the outcome of the GST meeting is a non-event for the markets for the time being.
Q) Even after the recent rally do you see any stocks with strong fundamentals and attractive valuations? Any mispriced opportunities which one can look at?
A) While we continue to remain positive on the rural, essential, and digital themes which have played out along expected lines since the beginning of the crisis we believe that there are is a clear case for further upsides in most sectors given revenue visibility and strong growth prospects.
Continues strength in the rural economy on the back of a good monsoon along with pent up demand bodes well for Agrochemicals, two-wheelers, and tractors.
Similarly, we expect the IT sector will continue to do well as the demand environment continues to remain robust due to the greater adoption of digital technologies.
Telecom is also expected to continue doing well given the increased demand for data and a gradual increase in ARPUs due to consolidation in the industry.
While we see continued momentum in sectors with strong revenue visibility we also expect that the recovery theme will continue to play out in the near future, though it is likely to be uneven with different sectors charting out their own recovery path.
We expect demand for PV and low ticket consumer durable will rebound at a much faster rate given pent up demand. Demand for cement is also expected to rebound strongly due to pent up demand and the Government’s focus on infrastructure and rural housing.
In the IT and Pharma space, we continue to remain positive on HCL Technologies and Granules India. We also like Reliance Industries (RIL) as it looks to transform itself into a digital play from a brick and mortar company.
Hero MotoCorp, Endurance Technologies and Swaraj Engines are our top picks in the auto space. We are also positive on Chalet Hotels, Inox Leisure and VIP Industries which are part of our recovery theme.
Q) What is your call on the GDP data and can we say that the worst is factored in?
A) The Q1FY21 GDP growth numbers have come in below consensus estimates at -23.9% YoY. The contraction was led by the manufacturing sector which de-grew by 39.3 percent while the services sector registered a de-growth of 20.6 percent on a YoY basis. Agriculture as expected did well and posted a growth of 3.4 percent YoY for Q1FY21.
While the contraction in GDP for Q1FY21 was more than consensus estimates we believe that it has already been factored in to some extent as we are at the end of Q1FY21 result season.
While the Q1FY21 corporate results have been more or less in line with market expectations the weak GDP numbers point to weakness in the MSME and the unorganized sector.
We expect the RBI will continue to use more of its unconventional tools like OMO and operation twist in order to bring down the longer end of the yield curve given that the spread between the overnight and the G-sec rate is at ~200 bps as compared to a normal spread of 75bps.
The RBI is likely to keep its policy rate on hold for now given that CPI inflation at 6.9 percent for July is well above the RBI’s comfort zone.
However, we expect the RBI to cut rates as and when inflation falls back below the 4 percent levels.
Q) Sectorally, which are the sectors that will produce leaders of tomorrow and why?
A) While we believe that India will be a stock pickers market given the wide range of stocks and sector listed on the exchange there are certain sectors which we which will continue to outperform the markets given growth levers.
Consumption: We are positive on both consumer discretionary and consumer staple from a long term perspective despite short term headwinds given that India is a growth market and will continue to remain one of the fastest-growing markets globally in the future.
Specialty Chemical: We also like the specialty chemical space as it will be one of the biggest beneficiaries of the shift in production from China to India. We also remain positive on rural-focused sectors like Agrochemicals, tractors, two-wheelers, etc from a long term perspective given the Governments focus on doubling farm income by 2022.
Q) Broader markets are back in limelight after 2 years of underperformance. How should one play the theme – should one increase exposure via individual stocks or by mutual funds?
A) While we remain positive on the broader markets we believe that mid and small caps will find it difficult to outperform the Nifty in the short-term given the significant outperformance in August.
Therefore, we expect mid and small caps to take a breather for some time before they start outperforming the large caps again.
For investors who do not have the time to do their own research on stocks and sectors investing through mutual funds would be the right way to go.
However, investors who have the time and are willing to do their own research can look to participate in markets through a mix of both mutual funds and individual stocks.
Q) It looks like we are heading towards 12,000 and then towards 12,400 levels going by the estimate of one of the brokerage house reports. The market is discounting a lot of things, but what could upset the appetite of bulls?
A) Expectations of improvement in economic activities due to easing of restrictions along with the possibility of a vaccine sometimes by the end of 2020 or early 2021 has helped push the Nifty to levels of over 11,500 and very close to its pre-COVID levels.
Markets seem to be factoring in an improvement in the economy over the next couple of quarters. Markets are also taking comfort from the fact that there has been a sharp increase in recovery rates to over 76 percent despite the recent surge in new COVID-19 cases.Moreover, there has been positive development on the vaccine front with three promising vaccines which are at various stages of development, and markets are building in the possibility that vaccination could start at the beginning of 2021.
Key risks that can derail the recovery rally are 1) Surge in infections as the economy is opened up further post unlock 4.0, 2) Delay in vaccine production as compared to timelines expected by markets, 3) Growth faltering significantly as compared to market expectations post-festive season.
Q) What is the strategy which one should follow around asset allocation? How much money should one be parking let’s say in overseas funds or stocks?
A) We believe that a well-diversified portfolio is a key to success for long term wealth creation. We believe that individuals should follow an asset allocation plan while investing keeping in mind their age and risk profile.
Generally, we recommend a higher allocation to equities for individuals who are at the beginning of their career and can take risks.
The mix would gradually keep change in the favor of debt throughout the lifespan of an individual. In the current market environment, we would recommend investors to stick to their asset allocation plans despite volatility in the markets.
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