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India Equity Strategy Report - Back to pre-covid levels - HDFC Securities

Posted On: 2020-07-05 21:57:04


Mr. Varun Lohchab, Head Institutional Research, HDFC Securities.

Nifty (ex-financials) is back to pre-covid peak levels and overall Nifty valuations back to ~18x FY22 PE (after consensus building in only 2% EPS decline in FY21 and 35% yoy growth in FY22). While earnings are difficult to predict near term, it remains to be seen if consensus can be right in FY21/FY22 after 6 consecutive years of significant overestimation. We still see downside risks to our and consensus FY21 and FY22 estimates. HSIE coverage universe has seen 12%/27%/15% EPS cuts for FY20/FY21/FY22 since Feb and building in -5%/36% yoy growth in FY21/FY22. Key swing sectors from overall earnings picture remain Energy and Financials which disappointed in FY20 and likely to remain so in FY21.

We see limited upsides across our coverage universe post the recent run-up, except financials and infra names where anyways recovery could take longer. Our preferred sectors are Telecom, IT, Chemicals, Pharma, Insurance, large banks, Cement, Gas while we are underweight consumption (staples, discretionary and autos). Our large cap picks in model portfolio include RIL, Bharti, Infosys, ITC, SBI Life, ICICI Bank, Axis Bank, L&T. Within mid-caps we like Max Life, IGL, Gujarat Gas, Crompton Consumer, Alkyl Amines, Galaxy Surfactants, JK Cement, KNR Construction.

FY20 earnings hit hard, FY21 outlook murky, FY22 "hope trade" yet again

Q4FY20 saw severe impact on earnings given Covid lockdown impact and commodity price collapse in March. Q4FY20 miss itself to ~12% cut in HSIE coverage FY20 aggregate PAT. Earnings misses were highest in Financials (Banks, insurance), consumer discretionary and Energy sector. While FY21 earnings decline is a given, ~15% EPS CAGR over FY20-22 on aggregate basis looks optimistic to us. We expect a high likelihood of further cuts to FY21 and FY22 earnings over next 6-12 months.

Economic recovery is progressing on expected lines with phased unlocking

With phased unlocking, economic activity is coming back to normalcy with certain pockets like rural demand (tractors, FMCG), two wheelers, cement, power demand faster to recover. Urban discretionary consumption is still lagging given impact on top cities. We are currently building in full normalcy in our estimates by Sep end and pace of recovery is on expected lines. However, we believe achieving 80-90% normalcy would be easy but reaching back to 100% activity level and beyond would be a challenge and slow grind.

Portfolio preference- O/w: Telecom, Insurance, Chemicals, Gas E/w: IT, Pharma, Cement, Banks; U/w: Consumer staples, discretionary, Autos, Metals, Oil, NBFC

With recent run-up back to pre-covid levels for most sectors (except financials, infra, metals), risk-reward has again turned unfavorable with limited upsides on our top picks. We maintain a mix of defensives (Telecom, IT, pharma, utilities), quality cyclicals (select banks, cement, autos, infra, consumer discretionary) with a positive bias towards technology (Telecom, IT) and manufacturing led gradual economic recovery which we play through cement and select financials/industrials. Our sector preference remains largely unchanged.

We tweak our model portfolio with a minor cut in weights for Retail,Cement, NBFC's, Pharma while adding weights in IT, Insurance, Consumer appliances. Introducing Mphasis, Max Life and Crompton Consumer to portfolio.


Source: Equity Bulls

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