First Published on April 13, 2020

Our central case for some time has been that, India will by and large, be able to restore a larger degree of normalcy somewhat earlier than expected. This take has been based on the current hospital occupancy and death numbers. We believe that COVID -19 is not spreading as fast in India, as it had in USA, Europe etc.

Our hypothesis is that as contagion factor in India is lower, it will be possible to contain/limit the spread, even if we restore significant amount of normalcy somewhat sooner. Of-course it will have to be backed with extensive testing and isolation of hotspot locations as well as instilling certain social habits.

This earlier restoration of larger degree of normalcy will help prevent extensive structural damage and the economy is likely to snap back to normal faster.

Of-course, if COVID -19, plays out differently, we bring the agility to revise our take quickly.

While, we have a constructive view of the Indian markets, “we still expect it to be choppy”, going forward. First, because we see significant downside risk in the US markets. Not only have they dithered in suppressing this Pandemic, but the US markets are currently not discounting the grim economic outcome. Second, there is bound to be bouts of nervousness in India as well as sentiment swings in these uncertain times.

Our strategy going forward

We plan to cut up-to 10% of equity positions (pharma overweight) at current levels. However, we will use any sell off towards 8300 NIFTY levels to aggressively build on banking and financial services segment.

Our sector wise take are outlined below:

Pharma sector has been one of our massive overweight and we plan to reduce the overweight to some extent. The Pharma call has worked exceedingly well for us. Even though the broader market has fallen 25%, pharma stocks have risen 25%. Though, the relative valuation still remains attractive, there has been a significant valuation catch up. There is likely to be excitement for some more time on margins on Hydroxycloroquine, that pharma companies can make.

As regards the Banks and Financial Services segment, we will continue to buy on any significant sell off. The conviction to buy at around Bank NIFTY index of 16500, comes form the fact that in our central case, we don’t expect COVID -19 to significantly damage the economy. As such, we do not see deterioration of Asset Quality, beyond what the market is already pricing in.

At the current levels, we are neutral on Auto Sector. However, we see upsides from the fact that there may be spurt in two wheeler (to a lesser extant car) sales as an outcome of general fear in using public transport. Further, Govt may reduce GST for a limited period in this sector to pre pone demand, as this sector constitutes 50% of the manufacturing segment.

PSU Segment – We continue to remain very bullish on this segment. With dividend yield around 6/7% and earning multiples below 10, the risk rewards in this segment remains extremely favorable. Oil companies, both refineries and upstream do face some issues though.

As regards FMCG sector though it will not be impacted by COVID -19, we will continue to avoid this segment, as it is trading at expensive valuations. Further there are issues with the supply chain and results are likely to disappoint the general expectations.

Information Technology

In the immediate term we expect discretionary spend (35% of the sector) to go down significantly as companies focus more on survival. The slack arising from this will bring pricing pressure to the remaining 65% of volume, that is the non-discretionary spend.

In the short-term currency depreciation of 8% has been a tailwind. Though I expect Indian Rupees to strengthen going forward. Another advantage that the IT companies have in dealing with the short-term issue is their ability to scale down manpower (65% of cost) to adjust to the lower volume of work. Hence, while their profits will be on squeeze, it will not turn in to negative zone even in FY 21.

In the longer run, Indian IT services companies may gain, as there may be a greater realization that more on site/near shore component can be done from offshore.

Further, there may be a greater push towards digitization for improving productivity as well as remote working in many other sectors, that may involve elements of IT support.

We remain a buyer of this sector at NIFTY IT index of 11500, that is 7 to 8% lower levels, at which Infosys may be trading at 13/14 multiples.