Covid 2.0: Investment Ideas

COVID-19 2.0 and Lockdown 2.0: Win Some; Lose Some

The second wave of COVID-19 has proven to be a terrible adversary with a significant rise in cases overwhelming the medical infrastructure of the country. Shortage of hospital beds, oxygen, Remedesivir, and other challenges now dominate the social media discussions. The market, too, is witnessing a significant correction in the wake of rising cases and re-imposed lockdown-like measures and strict restrictions across states.

While there are challenges, the government has proactively started undertaking measures to open up the immunisation program to cover a broader age group from 18 to 45 year old from 1st of May. This brings some clarity that the COVID-19 challenge is more likely to get over in a finite time frame of, say, the next 6 months. In this scenario, it is critical to assess the damage inflicted by the second wave on various sectors as well as on the corporate earnings as these factors most critically impact the market returns and valuations.

Basing the sensitivity analysis of the virus spread and the duration of lockdown, we estimate the FY22 earnings for NIFTY 50 to decline by 6% to 16% in the base to the bearish case scenario. This means FY22 earnings are likely to be in a band of 575 to 650 which still implies growth on FY21 levels. While this is not a doomsday scenario, it does indicate that a few sectors will underperform in the near to medium term while the other few will outperform. Accounting for all these factors, we cut our December 2021 NIFTY 50 target by 6% to 16100. Our key reasons are as follows:

BFSI, Discretionary Consumption, and Autos will bear the brunt of the impact:

Maharashtra, which contributes 14% of India’s GDP, has announced the most stringent measures by far as the state has the highest number of cases. In this scenario, a wide range of consumption activities such as travel, tourism, restaurants, small ticket discretionary and many others will be severely impacted. While there are not many listed plays in small ticket discretionary consumption like restaurants but all these will impact the BFSI sector as it is a lender to SME and MSME segment. The pressure in the SME and MSME segment has been there for a while and this will exacerbate the challenges. Thus, a 10% reduction in BFSI earnings cannot be ruled out. Similarly, the Auto sector is expected to see challenges considering closed showrooms and lower capacity utilisation.

While the sector may witness some pent-up demand, later on, it is unlikely to be as strong as the previous instance of 2020. Moreover, input costs are wreaking havoc on the Auto companies which they are already finding difficult to pass on. Thus, the profitability of the Auto sector will remain under pressure in 2021.

IT, Telecom Pharma, Consumer staples, Rural and Export themes to outperform: The IT sector will be unaffected by the domestic challenges and might even benefit from acceleration in digitization initiatives undertaken by the Indian companies. The IT sector may also benefit from a stronger Dollar. Similarly, the Pharmaceuticals sector is likely to outperform and benefit from the domestic challenges and see an earnings upgrade in the next 3 months. Dr Reddy’s and Gland Pharma are likely to benefit from the roll-out of Sputnik which has been recently approved by the government. Consumer staples, too, are likely to see their growth trajectory unchanged as food companies experience a positive impact. Rural will continue to do well as the last cycle also indicated that the pandemic impact was lower than its urban counterparts. Export themes should outperform because of the significant pick in global activity.

Metals, commodities, and other Cyclicals well placed: Metal prices have continued to rise even during the second wave of the pandemic globally. Similarly, other commodities have also continued to rise. In this scenario, the metal stocks are well placed. Even though the cyclical plays such as cement and capital goods may see some disruption in demand intermittently, the demand surge post the pandemic is very likely. Thus, cyclical space is well placed to outperform during these challenges. Correction in cement stocks and others should be used to accumulate.

Reduce NIFTY50 target to 16100 but remain cautiously optimistic: The impact on the market will be significant but there are enough structural plays that offer long-term earnings visibility. These should be accumulated during the current fall as they will deliver strong earnings growth and could see higher allocation in the short term. We remain cautiously optimistic on the equity markets and believe this to be a time to add and not panic.

Based on the above themes we recommend the following stocks BUY:

Gland Pharma, Dr Reddy’s, Britannia, Wipro, Bharti Airtel, Mind Tree, Dalmia Bharat, ACC and Dhanuka Agritech