We anticipate the market to be in a mild consolidation after the solid performance of the last three-four months. The triggers will be Q1 results, the feared second wave effect, likely selling by FIIs and high valuations reaching back to as high as pre-Covid level, while fundamentals continue to be weak.
Market could be range-bound with mixed bias
We expect a range of 10,500 to 11,500 for the key index of Nifty 50, in technical terms for the near-term. Currently, Nifty 50 as on 22 July was 11, 133 which is near the immediate next support I of 11, 150. We suggest profit bookingat the current level especially for traders and maintain accumulate strategy for long-term investors with a focus on sectors like Pharma, Chemicals, IT, and FMCG.
Fundamentally, pre-Covid we had a one-year forward target of 12,500 for Nifty 50, which was downgraded to 10,500, due to fall in earningsgrowth and outlook. The financial forecast for FY20 has fallen substantially while FY21 earnings areexpected to fall by -10%,compared to an estimate of +15% CAGR for FY21 and FY22 earlier. Currently, it is expected that growth will revive substantially in FY22 with more than 30% growth in earning due to low base of FY20 and 21. We can expect growth to catch-up from Q2FY21 onwards on a quarter to quarter basis. We continue to value Nifty 50 at a P/E valuation of 17.5x on one year forward EPS, still leading to a 2,000pts fall in target. The possibility of upside and downside to Nifty 50 target is evenly balanced today. The sensitivity of target, upside and downside are widely open. Today, the market is working more towards the positive side, due to a huge amount of fiscal and monetary support, fall in death and transmission rates, drugs, and vaccine development.
Market is buoyant, despiteheightened worries about asecond wave
Reported virus cases are exploding to a new high on a daily basis. The current actual fundamental data of the economy and companies do not provide confidence to take a directional call on the market. Valuation has also reached near the last high due to low earnings base. At the same time, the ability to forecast by economistsand analysts has faded due to the unique world health crisis, especially in the short to medium-term. The scenario is openly placed on the positive and negative side, given a vivid economic outlook when described without a virus threat and vice-versa. Positively, the world is more optimistic due to liquidity, drop-in bankruptcy risk, and hoping for a virus-free CY21.
We have to be careful about penny and small-cap stocks which are doing well currently. Penny stocks usually dothat; they tend to start late in the market rally and outperform the main indices andquality stocks during the last phase of the rally. This time too,these penny stocks are doing well, also because they had corrected hugely during the market fall of February to April. In the near-term they may hold on to the momentum and outperform in the ongoing rally, but would fall more when the main indexes and quality stocks start to do better after a consolidation.
Q1 preview is weak, while market is at the top-end of the curve
A preliminary preview of Q1FY21 seems to be very muted and to be the worst quarter of FY21. Q4FY20 was impacted by supply chain issues in China and its impact on world demand. Q1FY21 will be heavily impacted by the lockdown.
The market is indecisive,waiting for Q1FY21 results and global cues. An analysis of India’s key equity barometer, Nifty 50 index, provides a grim Profit after Tax (PAT) of all the top 50 stocks in India, to fall by -38% on a YoY basis. This is based on a Bloomberg estimate dated 12th July. The biggest fallwas seen in the Auto sector followed by other sectors except Financials, Chemicals, and Telecom. While the least impacted were the IT and FMCG sector.
A silver lining is that on a QoQ basis the trend is improving. It is estimated that PAT will improve by 27% though this is mostly due to the low base of Q4FY20. Still, this trend is expected to continue with improvement on a QoQ basis as the economy is being opened in a phased manner. Importantly, the sectors which are dodging the trend and which are expected to expedite in the future are Finance, NBFC, and Pharma. The sectors which had limited impact are IT, Chemical and FMCG which can do better from next quarter onwards. Noticeably, few stocks which are doing well the situation are Zee Entertainment, Bajaj Finance, HDFC, ICICI, IndusInd, Britannia, HUL, RIL, Sun Pharma, Cipla, NTPC, and Airtel Infratel.
The initial results will be from IT, both Tier 1 and Tier 2 players are expected to post revenue decline of 5% to 8%. The initial results announced arepositive,and surprisinglythe pandemic has not impacted the sector, as anticipated. Nevertheless, it was expected that business will get better from Q2 onwards for which, the expectation has increased further post the result. At the same time, new and decent size of deals are going to upgrade the forecast of revenue and valuation. Also, post-Covid the outlook and need for digitization have increased. In the long-term, they are good investment propositions since the outlook for digitization has increased, there is stable offshore demand, reduction in cost due to WFH, and INR depreciation, although in the near-term some consolidation on stock to stock basis can happen.
The second sector in which we are going to see results is banking and is set to report weak operational performance. Business impact for banks was significant during the lockdown as there was no credit demand from retail, and banks were reluctant to lend to corporates fearing asset quality risks. In the stock market,the financial sector was the worst hit from February to June as they were already under NPA stress. Post lifting of lockdown things have started to normalize. As per RBI, scheduled banks credit growth increased by 6.5% YoY, and 0.3% MoM, as on 19th June. Valuation of banks continues to be cheap compared to pre-Covid level by 30%, NiftyBank one-year P/B stands at 1.5x versus 2.25x, factoring NPA concern.
Accumulation is the best strategy in this situation
The global equity market has been consolidating in the last one-month. Thehuge fiscal and monetary support has averted a collapse in the market providing a source of confidenceand avoided bankruptcy. Re-opening of the economy is adding continuity to business and CY21 could emerge as a virus-free world due to the development of vaccines and fall in transmission rate. In the last one month, the global market has turned cautious, especially in the near-term, since the second wave of virus infections are impacting the trend of the economy, leading to weak data in Q2CY20 and valuations being back to high.
During the month, the market has maintained its buoyancy supported by IT, Banks, Pharma, Auto,and RIL. IT sector looks goodbecause of much better result fromInfosys, new deals and outlook from next quarter onwards. Pharma because demandand outlook is very solid while banking sector is available at attractive valuations and the result for banks in quarter are not expected to be as bad asexpected earlier. Auto, due to cheap valuation and decent MoM data leading to improvement in near-term demand. At the same time, deals and announcements by Reliance Industries have also helped improve the market sentiment.Even in this situation, foreign investors are pumping billions of dollar into India at high prices and valuations.
Broadly in the market, mid and small-caps are maintaining a positive trend. We expect this strength to be tested in the coming months since the overall outlook for Q1 is weak and prices have increased well from the low of March leading to high valuations. We expect some consolidation in the near-term, not a big fallout, and suggest accumulation as the best strategy in this situation, consistently buying small quantities in the next six months. This strategy builds-in the benefit of upside and downside in the market, which is evenly built today given the varied situation and possibility of a large upside if economy prospers or otherwise if second wave and vaccine development slows down.