The stock market had a roller-coaster ride during Samvat 2076, as it rose till January 2020, then witnessed a sharp fall and later made an equally smart recovery. On Monday, the equity market hit a fresh record high on firm global cues after Democrat candidate Joe Biden emerged winner in the 2020 US Presidential elections.
The significant feature of equity market performance in Samvat 2076 has been the sharp divergences both across and within sectors and companies - highlighting the differentiated impact of Covid on various sectors.
As the markets are on the cusp of entering Samvat 2077, both the indices hit their respective all-time high, in-line with the improving data points and positive corporate commentary. More importantly, Covid-19 cases have seen a meaningful decline. That apart, better-than-expected results and comforting commentary / guidance from India Inc have allayed investor concerns, analysts say.
"Improved corporate earnings have also buoyed the market sentiments. We expect Nifty EPS growth of 4 per cent in FY21 while expecting a sharp rebound in FY22," wrote analysts at Motilal Oswal Financial Services in a recent note.
While the rally till now has mostly been led by classic defensive plays like fast-moving consumer goods (FMCG), healthcare, and information technology (IT), analysts say there is still more steam left in stocks of these sectors. That apart, they suggest allocating investible funds to cyclical sectors and stocks, which they feel will go well as the economic activity picks up pace over the next few quarters.
Here's a look at the sectors/themes that analysts expect to do well in Samvat 2077.
IT stocks are expected to continue their northward journey in Samvat 2077 as well. The sector has been one of the biggest beneficiaries in the Covid-19 era as investments in digital assets gained currency across the world. That apart, the sector will do well on reports Biden plans to increase the number of high-skilled visas, including the H-1B, and eliminate the limit on employment-based visas by country, both of which are expected to benefit tens of thousands of Indian professionals.
According to analysts, IT is now a mainstream growth driver for the economy rather than a one-off line item. Thus, they see this continuing to drive earnings and margins for the companies. "We expect IT to continue its upward growth trajectory given the large deal wins, lower attrition rates, higher digital share, and positive management commentaries," said analysts at SBICap Securities.
Banking is another sector that is expected to do well. A barometer of the economy, analysts expect the sector to do well as economic activity picks up pace over the next few months.
"We have seen the bank sector stocks underperform for a long time. Before Covid-19 struck, we had a feeling that the non-performing assets (NPA) cycle has peaked and in fact, provisioning is also at a multi-year high. Covid-19, however, had raised questions. We now believe that banks have adequate provisioning for issues stemming from Covid-19," said Amar Ambani, senior president and head of research for institutional equities at YES Securities.
Echoing similar views, Abhimanyu Sofat, Head of research at IIFL Securities, notes that private sector banks are expected to do well in Samvat 2077 as core sector industries have started to do well. "If the metal industry does well, they will have the money to repay the banks as most companies are leveraged. If banks get their dues, their NPAs will come down," Sofat said.
Analysts at HDFC Securities also note that banks seem to be headed higher, but with intermittent corrections.
Pharma sector is also attractive, though repeating 2020’s performance will be difficult, say analysts. Covid-19 has opened up new opportunities for drugs in India and abroad and a lot of these companies have gone through a consolidation period rather than transitioning into complex, generic players, analysts say.
Most analysts are of the view that personal mobility vehicles are expected to do well. The demand for entry-level passenger vehicles (PVs) and two-wheelers (2W) have risen. However, they caution that this could be driven by pent-up demand in the retail market and bumper retail sales in Navrathra and Dussehra, and preference for personal mobility during the pandemic. Hence, the real picture will emerge in the first quarter of 2021.
"We like four-wheeler automobile space. They are consolidating right now, but if we look at it from a penetration basis, we have a long way to go," said YES Securities.
Meanwhile, few analysts are betting on the commercial vehicle (CV) space as well. The CV industry is poised for healthy growth led by increased government spending on infrastructure, mining, and pick-up in economic activity. "Further, the increased preference towards the hub and spoke model bodes well for the LCV industry which has shown decent recovery in recent months," notes Religare Broking.
Another sector that most analysts are bullish on is metals. Metals, analysts say, could be a dark horse powering ahead due to the underperformance to broader markets, favourable product pricing, a strong recovery in economic activities accompanied by substantial exports. Metal prices are surging due to a recovery in Chinese demand and an uptick in construction activities.
Out of the entire chemical market in India (worth nearly $180 billion in 2019), specialty chemical is nearly 18 per cent (nearly $32 billion) as of FY19 which is further expected to grow at a 12 per cent compound annual growth rate (CAGR) from FY19-22, notes Religare Broking. "Due to the Covid-19 pandemic, the players have faced significant challenges that have impacted overall performance. However, with the gradual re-opening of the economy, there is an improvement in demand, and capacity utilisation levels getting back on track suggest that recovery is quite possible from H2FY21 onwards," it added. Further, a shift in preference from China to India due to environmental concerns, and US-China trade tension are also expected to boost the chemical players.
Telecom, paints, and capital goods
Besides these, analysts are also positive on Telecom, paint, and select names in capital goods space such as L&T. Indian paint sector is expected to grow in double-digit driven by government initiatives for housing, rising disposable income, increase in rural spending, and reduction in repainting cycle and pickup in auto demand. As regards Telecom, analysts note that the worse of pricing war is behind us and the industry would collectively look to increase tariff at regular intervals.
"Consumer staples, on the other hand, have not gone much either way after the re-rating in the earlier part of the new year. Valuations are fairly rich and hence may not leave much scope for a major move," says Amit Khurana, Head of Equities at Dolat Capital.