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India Equity Strategy - Up too much, too soon - HDFC Securities

Posted On: 2020-05-06 14:18:45

We are not fully convinced of the durability of current market up-move (Nifty up 30% since 23rd March'20) and believe that street has not fully factored in the impact of CoVid-19 induced lockdown. Mar-20 volume/earnings disappointment from large index stocks such as HUVR, RIL and rising CoVid19 provisioning for banks are precursors to greater systemic earnings weakness in coming months. Nifty is now down ~20% since pre CoVid-19 highs in mid Feb'20 (vs. ~40% decline till mid March), while as per our assessment CoVid-19 impact on FY21 EPS of HSIE univ could be >30%. Already, FY21 EPS growth est for HSIE coverage has been cut from +20% YoY (pre CoVid-19) to -5%YoY, and we see potential for further cuts. RBI's rate cut/liquidity measures are not percolating into the system as intended while fiscal measures have been delayed and underwhelming. We continue to recommend a largely quality, value and defensive portfolio bias given ongoing uncertainty and heightened volatility with ~4% allocation to cash. Our key picks are: Bharti, ITC, UNSP, Ultratech, SBI Life, ICICI Bank, Axis Bank. IGL, CDSL.

Consensus earnings analysis- negative impact not yet fully priced in

Based on our analysis of consensus earnings estimates for Nifty constituents (details pls see pg 5) we believe that street has not yet fully factored the impact of CoVid-19 on corporate earnings. In our earlier note (link here) we estimated a hit of >30% on FY21 aggregate PAT of HSIE univ in a scenario of protracted lockdown and slower return-to-normalcy trajectory. However, till date consensus FY21 Nifty EPS has been cut by ~15% and for FY21 consensus is still building in a growth of 13%YoY. This is optimistic - given the intensity and extent of lockdown FY21 will be a negative earnings growth year. In contrast, HDFC sec has already cut FY21 aggregate PAT est by 26% and we currently expect -5%YoY FY21 PAT growth for HSIE univ.

4QFY20 earnings: disappointments likely to strain market in May'20

Many large sector leaders have posted Mar-20 earnings disappointment on an already muted expectation. Most notably, HUVR's 7%/2% YoY volume/PAT decline in 4QFY20 (despite a trend run rate till mid Mar'20) -clearly points to an underestimation bias, which is likely to unravel as we move through the chunky part of earnings season in May'20. We expect more disappointments than surprises, implying a continuation of cuts in May'20 and a likely pronounced negative price reaction given the recent run up. We expect a continuation of negative mgt commentary w.r.t. CoVid-19 impact on FY21 earnings.

Recent uptick - a bear market rally rather than a decisive turnaround

We would deem recent mkt surge more as a bear market rally and not a resumption of bull market. Proactive and co-ordinated moves of global central bankers and governments have helped to mend financial market sentiments, but the impact on real economy and corporate earnings seem to be underestimated after current rally, in our view.

Source: Equity Bulls

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