DAILY VOICE | September quarter is likely to be better than Q1 FY21: Sahil Kapoor

The companies which were able to rationalise cost may show some stability emerging in the bottom-line but sales are likely to see a continued impact from COVID-led disruption, Sahil Kapoor, Chief Market Strategist, Edelweiss professional Investor Research, said in an interview with Moneycontrol’s Kshitij Anand

edited excerpts:

Q) After a muted September, October started off on a positive note. But, most experts are advising caution after the much "hated rally". Do we say that because fundamentals are not supporting the conviction seen in the market?

A) The stock markets are discounting a quick rebound and revival for which investors are paying top dollars today. Between September 16 and October 6, the market has moved nearly 1,650 points.

This is just a glimpse of volatility which is likely to unfold over the next month. Purely from an earnings perspective, Nifty at 11,650 to 11,800 range trades at 19.2 times FY22 earnings.

This leaves a shallow margin of safety even when we account for a quicker path to recovery. Secondly, India's high-frequency data is still patchy. Several indicators are yet to improve meaningfully to reflect and support the current rich valuations.

For instance, it took five months for India's manufacturing PMI to recover and get back into expansion territory but the largest part of the economy, the services sector, is now into the seventh month of sequential contraction as measured by services PMI.

This calls for caution at higher levels. However, because the market isn't sitting on multi-year gains or on excessive leverage, the corrections are regularly being bought and are short-lived.

Hence, we advise an approach to invest on occasions when markets fall sharply and given up the froth accumulated in the recent rally. We think the fair value of Nifty starts to emerge closer to 10,300 levels.

A) September quarter is likely to be better than the June quarter but many sectors are likely to see a year-on-year contraction.

The companies which were able to rationalise cost may show some stability emerging in the bottom-line but sales are likely to see a continued impact from COVID-led disruption.

A) At this time the banking sector has low visibility in terms of advances growth and NPA recognition. The regulatory forbearance has bought some time for banks to let this tumultuous period pass.

We expect a few private banks, which are showing strong operational performance, to continue to do well. PSU Banks may remain underperformers. Historically, PSU banks have been the hardest hit by the crisis and even in the current cycle, it could play out similarly.

At this instance, we continue to remain focused only on a few Private Banks and select NBFCs like ICIC Bank, Axis Bank, and Can Fin Homes, HDFC Ltd.

A) We think that the trend in the Auto sector is normalising and may take some more time before the gains from pent-up demand levels off to a more sustainable level. That new normal may indicate the time which the sector would take for recovery.

We have played one tactical uptrend in tractors, two-wheelers, and select auto ancillaries and are open to opportunities that the sector throws open.

But, don't see September numbers as green shoots across the sector as it is more product and segment-specific.

A) The most important factor remains the business model, valuations, and your investment horizon. Investing in an IPO because of any other reason is a purely tactical bet for short-term gains which may or may not fructify depending on subscription multiples, liquidity, and market sentiment.

It's better to stick to deep due diligence and look at bargains or take expert advice in case you want to trade tactically in IPOs and listings.

A) The last quarter is most likely to start with a lot of volatility and end on a calmer note. Since the economic recovery is still weak and patchy more signs of stability and revival will be welcome.

COVID-19 is still a concern in various places around the world. But one common trend which is becoming visible is that the world is beginning to fight it better.

The fatality rate has begun to fall and infected people are being tested and treated early. This opens the possibility that things will normalise over time. With a vaccine, it will be quicker but without one it will still normalise.

That's the promise that the last quarter of 2020 may show up. For markets, I suspect another round of risk aversion may play out which will eventually give way to a stronger uptrend in 2021.