Top 10 Stocks To Buy Amidst Covid-19 Meltdown: Strategy Report By HDFC Sec

India Equity Strategy

Stick To Quality

While the CoVid-19 situation remains fluid, we believe that Nifty correction of ~30% already factors in the impact of ~1 month lockdown and return to business normalcy by Q1 end. However, if the lockdown is more severe and the business impact extends well into 2Q, we see further downsides. Recent sharp correction presents attractive opportunity for long term investing into high quality names.

While government and RBI have announced stimulus packages, we expect further measures to tide over the crisis. The extent of lockdown, pace of return to normalcy and further fiscal responses remain key monitorables.

Our key picks include: Infosys, Bharti, ICICI Bank, Axis Bank, ITC, UNSP, UTCEM, IGL, CDSL, CIFC.

Stick to quality names with competitive & resilient biz models

Given the severe hit to the real economy and uncertainly over the intensity, spread and duration of CoVid-19 pandemic, we recommend exposure to high quality GARP compounders with cycle tested business models, low financial leverage and a strong competitive positioning – which will likely further consolidate post crisis.

Based on our earnings sensitivity analysis, IT, Consumer Staples, Pharma and Chemicals will ride out the current turbulence with low earnings hit and should form key portfolio weights. Telecom will also be largely insulated and may actually benefit owing to higher demand in near term.

While BFSI may have to absorb some negative impact on the economy, we continue to prefer large sector & niche market/segment leaders, given sharp price correction and resilient biz models. Consumer discretionary like autos, retail, entertainment, eating out, aviation are already facing demand shocks and will take time to normalize.

Stress testing earnings for CoVid-19 impact

We have done a detailed bottom up analysis to assess impact of CoVid-19 related disruptions on earnings of HSIE coverage under two scenarios: 1] Impact till 1QFY21 2] Partial impact till 2QFY21. Scenario 2 seems more likely owing protracted lockdown and slow recovery. HSIE coverage PAT will see 19%/30% PAT hit under scenario 1/scenario 2.Unsurprisingly, Staples, Pharma and IT (all defensives) will be least hit with FY21 PAT hit between 2-10%. Aviation is likely to see swing to losses. Upstream and downstream oil companies are severely hit owing sharp fall in oil prices, followed by cement, RE, infra, cons disc & BFSI (see pages 2-9 for detailed company wise analysis).

Strong policy response to the crisis, but more needs to be done

Government and RBI have responded strongly to the CoVid-19 crisis. RBI has addressed it in a multi-pronged fashion cutting policy rates by 75-90bps, providing unprecedented single-shot liquidity (~1.8% of GDP) through CRR cuts, TLTRO, MSF and allowing forbearance/moratorium on loan servicing. However, the fiscal package has been somewhat underwhelming and has effectively provided fiscal relief of just ~0.5%-0.6% of GDP.

This is significantly lower vs. relief packages announced by various countries (ranging from 2%-16% of GDP) and we believe that FM will announce further measures targeted at small businesses, organized workers, highly impacted sectors etc.

Takeaways from interactions with management to assess CoVid-19 impact

We interacted with senior management of 25+ corporates to assess impact of CoVid-19 on their business and earnings over the near term and FY21. Please see below for a comprehensive coverage of key takeaways from interactions.