These stocks may see fastest recovery if crisis recedes: ICICI Securities

Brokerage ICICI Securities believe that cyclical stocks which have corrected largely due to the rise in ‘systematic’ risk could see the fastest recovery if the crisis recedes quickly. From a demand perspective, domestic cyclicals connected to the investment cycle, credit cycle and pent-up spending.

This includes industrials, banks, financial services, auto, discretionary consumption and real estate sectors which are largely unrelated to the current geopolitical crisis.

In common parlance, systematic risk is that part of the risk that is caused by factors beyond the control of a specific company. It is also known as market risk. “Systematic risk’ drags down high-beta stocks thereby creating opportunities in cyclical,” ICICI Securities said in a report.

Of late, the benchmark NSE Nifty index has declined over 4 per cent to 16,793 on February 28, 2022 from 17,532 on October 1, 2021. Market watchers believe that sustained outflow by foreign institutional investors, concerns over inflation figures, hopes of faster tapering, new Covid-19 variant and now the conflict between Russia and Ukraine dampened sentiment.

Among the cyclical stocks, ICICI Securities preferred at least 14 cyclical stocks including State Bank of India (SBI), Axis Bank, HDFC, UltraTech Cement, Larsen & Toubro, Hindalco, Coal India, Gujarat Fluorochemicals, Ashok Leyland, APL Apollo, Jindal Stainless, Phoenix Mills, Sapphire Foods and Greenpanel.

Meanwhile, the latest macroeconomic data indicates that the economic recovery continues as Covid-19 cases recede sharply. High-frequency indicators announced for January and February also pointed towards economic recovery as new Covid cases dipped sharply to a 7-day average of around 10,000. 

The latest data showed that the Goods and Services Tax (GST) revenue in February was 26 per cent higher than pre-pandemic levels at Rs 1,33,026 crore. India’s manufacturing sector also saw an expansion in output and new orders in February as per the IHS Markit Purchasing Managers’ Index (PMI) which advanced to 54.9 for the month, from 54 in January. A reading of 50 on the PMI indicates no change in activity levels.

“If the geopolitical crisis recedes from the extreme global brinkmanship seen recently and converts into a localised conflict alongside negotiations, then we do not see any major earnings revision. On the flip side, if the geopolitical situation continues to worsen, the extended period of elevated commodity prices is likely to further increase the input cost pressures felt over the past several quarters across sectors and could eventually impact aggregate demand (consumption),” ICICI Securities said, adding earnings outlook for most sectors which rely heavily on commodities as raw materials will get impacted.

The brokerage also prefers NTPC, Bharti Airtel, Tata Communications, Infosys, Alkem Laboratories, Dr Reddy’s and Dabur among non-cyclicals players.

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