Earning good returns in volatile share market: These sectors set to outperform in next 5 years | INTERVIEW

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Published: July 24, 2020 11:59 AM

For long-term investors accumulation, buying a fair amount of funds, as per the risk aversion, on a consistent basis, is the best strategy, especially in the next 6 months

Pharma, Auto, IT, Bank, stock market, COVID-19, coronavirus vaccine, RILTwo sectors which are underperforming today like Banks & Auto should be considered a contra bet with small amounts of exposure currently

Indian share market bounced back over 45 per cent from March lows amid many ups and downs. Analysts maintain their cautious view on the market in the short-term. Vinod Nair, Head of Research at Geojit Financial Services, believes that if investors wish to earn decent returns in this volatile market then sectors such as Pharma, IT, Chemicals and export-oriented companies can be looked into. These sectors may outperform the stock market by a wide margin in the next 5 to 10 years. In an exclusive interview with Surbhi Jain of Financial Express Online, Nair explains even as vaccine trials for COVID-19 are underway, this may not boost the profitability of Indian Pharma sector. He also sees the IT sector as a good investment opportunity amid increased need for digital.

What is your outlook on the June quarter earnings so far? What according to you have been the hits and misses?

The outlook for Q1 is muted, the consolidated PAT of Nifty50 constituents is expected to de-grow by 38% on a YoY basis, as per our assessment of Bloomberg consensus estimate of respective companies. The silver line is that growth is expected on a QoQ basis due to a low base of Q4FY20. Few sectors like Banks, NBFC and Pharma will do better due to fall in the provision, income from investment and demand for healthcare while some sectors like IT & FMCG are expected to have minimum impact.

 The initial results are marginally better than anticipated, mainly supported by IT & Banks. IT, due to positive guidelines by management, deals and better financials from Q2 onwards. Also, post-Covid the outlook and need for digital has increased. Cost is likely to be supported by Work from Home, we think that they are a good investment opportunity in such a situation, though in the near-term some consolidation on stock to stock basis can happen. The outlook for Banks has improved a bit lately due to fall in moratorium and provisioning, not as bad as forecasted earlier. Even though initial results are better than anticipated, the end will be watchful.

How do you see the pharma sector with vaccine trials underway? What are your preferred stocks from this sector?

Vaccine is not expected to boost the Indian Pharma sector in terms of revenue and profitability especially for listed companies because in the majority they are at the 1st and 2nd phase of testing. But it will benefit Indian Pharma sector as they are a key source of capacity to manufacture doses in the future. We are very positive on the pharma sector given a solid outlook in India & abroad. The demand has increased due to the health crisis and will lead to much higher valuation than the downgrade we had in the last 3-5yrs. The outlook was impacted by regulatory fallout in USFDA observations and pricing issues. Today, this concern revered into an opportunity as a preferential provider of pharma products in the US. The stocks which are our top pick are Torrent Pharma, Biocon, Dr Reddy’s Laboratories and Cadila Healthcare.

Post back to back investments in Jio, including that from Facebook and Google, and stock movement since April, do you think RIL stock is better than Bharti Airtel in the telecom space?

Yes, RIL is better placed because of its stable cash flow position compared to others. The balance sheet position is very stable, with improved ability to undertake more capex which will be hugely required for the sector going forward like additional to spectrum, products, services and changes in technology like 5G.

With many states reinstating lockdowns amid rising COVID-19 cases, where do you see Sensex, Nifty in next three months?

 We have a cautious view on the market in the short-term. Fundamentally our target for Nifty50 is 10,500 based on the preview analysis of Q1FY21. Upside and downside to our forecast are evenly placed based on actual Q1 results and development of the vaccine. Profit booking is advisable especially due to solid bounce-back of plus 45% return from March low, in less than 4 months. Technically, since Nifty50 has crossed over 10,850 level, 11,150 to 11,250 is achievable while 10,500 and 10,000 are strong supports in the medium-term.

One advice you would like to give to investors to earn decent returns in this volatile market?

We forecast sectors like Pharma, IT, Chemicals and export-oriented companies to outperform the market hugely in the next 5 to 10 years. We suggest higher exposure in these sectors. Two sectors which are underperforming today like Banks & Auto should be considered a contra bet with small amounts of exposure currently and increase in the future by a step by step method. They have the possibility to develop as multi-baggers in the long-term, importantly we should be stock specific and stick with quality names. For long-term investors accumulation, buying a fair amount of funds, as per your risk aversion, on a consistent basis, is the best strategy, especially in the next 6 months. We expect consolidation in the market during H2 CY 2020, so we have to be cautious in the short-term and be stock & sector-specific as mentioned above.

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