Update To Mid-Cap Stocks Recommendations After Crash Due To Covid-19

Covid-19 major threat to global growth but provides opportunity to build long term portfolio…

We have envisaged the impact of Coronavirus (Covid-19) on our midcap coverage universe based on the revenue contribution from both the US as well as Europe. Since we believe these two geographies are witnessing an upsurge in patients infected by Coronavirus, there is a high probability of city lockdowns in the near future as witnessed in a few European countries recently. We expect this to largely hamper manufacturing growth compared to the services sector, going ahead.

In our midcap universe of 11 companies, we expect Tata Chemicals, VA Tech Wabag, Emmbi Industries and Kanpur Plastipack to be the most impacted stocks given that all these have revenue contributions in excess of 30-35% from the said geographies.

The rest from our universe could be impacted by supply chain issues related to raw material, which, we believe, is largely discounted in the stock price.

In terms of RM requirements, majority of the chemical inputs are imported from China. With China returning to action recently albeit at lower utilisation, we do not expect much impact from the supply side. However, the real impact can come from the demand side due to the cascading impact of the slowdown. This can eventually lead to suppressed prices and, thereby, financial growth of most companies.

Further, a cash flow crunch can impact the debt repayment schedule. However, we expect the same to be refinanced largely as most economies are coming out with quantitative easing (QE) leading to lower interest rates. However, we expect companies with high levered balance sheet or low cash flows to face challenges to refinance.

Thus, we believe one should select strong balance sheet companies with low leverage and higher cash flows during these turbulent time. We also believe the Covid-19 issue is not relevant only to one geography but is widespread globally. Hence, central government/central banks are expected to eventually come out with assistance to manage the entire global economy.

Valuation & Outlook

We believe majority of the negative outcomes from Covid-19, for at least the next two quarters, have already been discounted across global indices. However, either any delay beyond that or a substantial increase in infection can result in more negative outcomes.

Hence, the probability of a further downside in equity indices cannot be ruled out. However, we believe majority of the stocks are available at suppressed valuations. Therefore, we believe this is the right time to build a portfolio in a gradual manner to gain from the roller coaster ride ahead.