By Gaurav Bora (Market Expert)
Let’s go back Nifty came down from 12,400 to 7,500 global economy was in good shape even there was massive growth in India, India were about to take 15-20% growth with building a strong base. In Jan Covid-19 came in China and nobody thought it will spread across globe and it have created so much havoc. But China managed it very well and whole globe is following the same process which will bring Covid-19 curve down very sharply in coming week. India announced 21 days lock down which can break this Covid-19 chain as virus has 14 days lifecycle.
Stock market has captured that there will be no growth in coming financial year and it has been priced in but analyst and rating agencies are forecasting 5-6% growth which can be positive surprise for markets. Due to 21 days lock down which can be extended further there will be recession in economy but it has been already done in stock market in previous days. Current challenges also present with one of the biggest opportunity to accumulate assets at reasonable valuations. But stock selection should be on the basis of strong balance sheet, low debt and low levered businesses. There will be V shape recovery in some sectors so investor should prefer those sectors only.
Investors should be very selective and accumulate stocks of such sectors which are less affected due to lockdown. In every recovery rally leaders of the rally get changed so we are recommending sectors which are less affected with this lock down and these sectors will outperform in this recovery rally. There will be underperformance from frontline stocks which are from lockdown affected sectors.
Non Affected Sectors:
Oil & Gas
Pharma stocks have been in the focus among the confusion caused by the coronavirus outbreak, the sector is better placed to navigate the economic crisis brought by the pandemic. The highly contagious virus has taken a huge toll on most sectors, but pharma companies have withstood the carnage, with some stocks delivering healthy returns. Pharma and healthcare sectors have a crucial role in supporting the government and people and are doing a great job by managing medicine supplies as demand remains strong. Pharma as a sector has emerged as strong contender to drive the next leg of the rally as sector was into multiyear consolidation since 2015 to 2020.
Dr Reddy’s Lab
In this lockdown I find FMCG is the most immune sector and we may see good volume growths in coming time as consumption will get increased. Fast moving consumer goods (FMCG) are the fourth largest sector in the Indian economy. There are three main segments in the sector – food and beverages which accounts for 19 per cent of the sector, healthcare which accounts for 31 per cent and household and personal care which accounts for the remaining 50 per cent. FMCG market is expected to grow at 9-10% in 2020, urban segment witnessed growth rate of 8% whereas rural segment grew at 5% in quarter ended in September 2019 which is supported by moderate inflation, increase in private consumption and rural income. Growing awareness, easier access, and changing lifestyles are the key growth drivers for the consumer market. Govt’s initiatives to increase the disposable income in the hands of the common people, especially in the rural area, which will be beneficial for the FMCG sector.
Awareness of health products has increased given the current Covid-19 pandemic scenario and off take of digital health products has been on a rise. Demographic factors such as growing middle class, young insurable population and growing awareness of the need for protection and retirement planning will support the growth of insurance sector. Digitalisation will play a bigger role as people become more habitual to digital way of working. As per Union Budget 2019-20 100% foreign direct investment (FDI) permitted for insurance intermediaries to ensure adequate capital for insurers given the stress. The future looks promising for the life insurance industry with several changes in regulatory framework which will lead to further change in the way the industry conducts its business and engages with its customers. Life insurance industry in the country is expected grow by 12-15% annually for the next three to five years.
Telecom is one of the most essential services and sector at the time of the global Covid-19 pandemic. It has been a key enabler in helping governments and businesses in timely communication, tracking and also helping implement work from home. With increased resilience of working from home as viable alternative for several companies so consumer will not mind to spend more. This opportunity will create a new set of operating model, content consumption and assisted commerce where telecom companies can play a crucial role. The increased broadband usage at home has resulted demand in data consumption which can show increase in revenues. India is currently the world’s second-largest telecommunications market with a subscriber base of 1.20 billion and has registered strong growth in the past decade and half. The Indian mobile economy is growing rapidly and will contribute substantially to India’s Gross Domestic Product (GDP). India has the world’s highest data usage per smartphone at an average of 9.8GB per month. There is less competition in the sector and among the most benefited sector in this pandemic.
Reliance Industries (JIO)
Post this COVID-19 pandemic China’s reputation as a supplier has been damaged. Countries started finding out alternative supplier for China and India will emerge as biggest beneficiary as China produces 60% Metal of world’s total requirement so I will not be surprised to see India’s metal volumes get doubled from here. India holds a fair advantage in cost of production and conversion costs in steel and aluminium. Its strategic location enables convenient exports to develop as well as the fast-developing Asian markets. Metal are considered process industry and exempted from complete shutdown but has only skeletal staff operating. India is the third largest producer of coal. India ranks fourth in terms of iron ore production globally. India has around 8% of world’s deposits of iron ore. The Ministry of Steel aims to increase the steel production capacity more than double to 300 million tonnes by 2030-31 indicating new opportunities in the sector. FDI caps in the mining and exploration of metal and non-metal ores have been increased to 100% under the automatic route. There is significant scope for new mining capacities in iron ore, bauxite and coal and considerable opportunities for future discoveries of sub- surface deposits.
Lock Down has not impacted IT that much as people is working from home. IT companies are not having risk in balance sheet as they are sitting on cash so survival is not risk for the sector. The global sourcing market in India continues to grow at a higher pace compared to the IT-BPM industry and India is the leading sourcing destination across the world. India has become the digital capabilities hub of the world with around 75% of global digital talent present in the country. India is the topmost offshoring destination for IT companies across the world. Having proven its capabilities in delivering both on-shore and off-shore services to global clients, emerging technologies now offer an entire new gamut of opportunities for top IT firms in India. Export revenue of the industry is expected to grow 7-9% year-on-year to US$ 135-137 billion in FY19 and expected to grow to US$ 350 billion by 2025 and BPM is expected to account for US$ 50-55 billion out of the total revenue. Leading Indian IT firms like Infosys, TCS and Tech Mahindra are diversifying their offerings and showcasing leading ideas in block chain, artificial intelligence to clients using innovation hubs, research and development centres, in order to create differentiated offerings.
Oil & Gas:
Crude prices have been a significant drop due to price war between OPEC and Non OPEC countries. COVID-19 pandemic impact has been less direct as oil and gas is essential. Lesser revenues due to lockdown and extended credit to customer likely to lead to potential cash flow impact. Crude prices have fallen so Indian import bills will be reduced. Demand slowdown from customer side owing to limited travel and reduced consumption leading to lower refinery throughout gross refining margin (GRM) spreads and higher inventory build-up. Crude oil went down to USD22/bbl and it will remain to USD35/bbl for coming time which will keep oil marketing companies in limelight.
Private Banks are operating with less manpower in this lockdown and impact will be less in this pandemic. Rise in deposits of private banks has been increased due to yes bank fears. There was NPA fears in banks but RBI provided moratorium window to banks so it will not impact their books but there will be fear in unsecured loans but it has been priced in. Loan growth can be impacted in coming 2 quarters but increase in deposits will provide opportunity in coming time. Proportion of banking services availed through digital channels, particularly payments is likely to increase during lockdown. We expect banks to significantly increase their focus on engaging customers through the digital channels including recovery processes. The current crises have exposed the banking services to new way of working. The industry has made a reasonable smooth transaction to working remotely, which is likely to shape the cost structure in the days ahead and it will accelerate self-service. Private Bank stocks have been declined 40-50% from their highs which gives opportunity for investor to accumulate quality private sector banks at many attractive and reasonable valuations.