The stock market is at an interesting juncture where it is building a healthy recovery. From here on, for the recovery to sustain, developments on vaccination, and continued economic recovery will be important, says NAVEEN KULKARNI, chief investment officer (CIO) at Axis Securities, in interaction with Swati Verma. Edited excerpts
Your view on the current market.
The market is at an interesting juncture where it is building a healthy recovery. However, it has been quite sceptical about the recovery in the banking sector as the challenges of collections continue to persist. Q2FY21 will provide a better picture of the state of corporate earnings and recovery. Q1FY21 indicated that the Indian corporates have managed to cope with Covid-19 challenges better than expectations. Now, it will depend on how Q2 earnings shape up. Our ground checks indicate many industries have managed to come back to pre-Covid levels which are also getting reflected in the stock prices. From here on, the recovery to sustain, developments on vaccination, and continued economic recovery will be important.
Your take on mid and small-cap stocks after Sebi's latest rule on multi-cap funds.
We were of the belief that small and midcaps will perform as valuations beyond the top 15 stocks are quite attractive and the underperformance of small and mid-caps which started in early 2018 was coming to an end. The Securities and Exchange Board of India's (Sebi) ruling is acting as a catalyst for the performance of the small and mid-cap stocks.
Is it still a good time to enter information technology (IT) stocks?
IT stocks were expected to re-rate and that is happening now. The guidance of IT companies has been quite encouraging. So, from a perspective of steady returns, IT stocks are a good bet to enter even at the current levels.
What's your view on the pharma stocks? Do you see more upside?
The pharmaceutical sector is in a structural uptrend and that trend could sustain over the medium term. The sector is likely to see an improvement in return ratios from here and stocks like Dr. Reddy’s, and Biocon will continue to deliver good returns.
Your view on RIL. It has played a significant role in lifting the benchmark index. Is it still a buy?
RIL is into a completely different zone with fundraising and foreign listing plans of its subsidiaries. The bulk of the returns have already come. Returns from current levels will depend on triggers like the listing of Jio or retail business.
Your expectations from September quarter earnings.
September quarter earnings will be very important as the impact on the banking, financial services, and insurance (BFSI) sector will be one of the critical factors. Overall, a decline in earnings is likely but business recovery management commentary will hold the key.
What are the sectors/stocks you are bullish and bearish on and why?
Our key positive sectors are IT, Pharmaceuticals, Staples, Chemicals, Agri, and Automobiles where we expect recovery and traction of recovery to play a key role. We are underweight on industrials and infrastructure where recovery seems elusive.
One sector/theme that can emerge as a dark horse this year.
Cement can still be a dark horse as the sector earnings depend on pricing actions than just volume recovery. Historically, the sector has demonstrated good pricing discipline. Thus, if pricing sustains, the sector could still deliver good returns.