Samvat 2078: Q2 results, strong demand, economic recovery to drive D-St; Travel & tourism sectors in focus

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November 04, 2021 11:47 AM

Given the sharp rally in markets, valuations have become expensive and can be sustained only through consistent earnings delivery

India witnessed the third consecutive year of normal monsoon in 2021 which is also likely to aid rural demand.

Equity markets had a historical journey in Samvat 2077, as it touched new lifetime highs with Nifty/Sensex surpassing the 18k/60k mark for the first time in history. The recent sprint to 15k in Feb’21 and 18k in Oct’21, from pandemic lows of 7.6k in Mar’20 – amid lockdowns and other health challenges – has been led by benign global liquidity, containment of COVID-19 cases, significant pickup in the pace of vaccination, sharp recovery in corporate earnings and a market-friendly budget.

Nifty has given around 43% returns in Samvat 2077 (as on 26th Oct, 2021) , while Midcaps/Smallcaps have outperformed and are up 70%/82% respectively. The theme of Samvat 2077 was high beta, cyclicals and value stocks. Among sectors Metals (+114% YoY), Realty (+113%) and PSU Banks (+108%) were the top gainers. On the other hand, Pharma (+20%), FMCG (+25%) and Private Banks (+33%) were underperformers as defensives took a breather.

Macroeconomic trends saw good recovery, with high-frequency indicators (GST collections, e-way bills, PMI readings, power & fuel demand) improving month-on-month. India’s Real GDP grew at a record 20.1 percent YoY in Q1FY22. The IMF has projected India’s GDP to grow at 9.5 percent in 2021 followed by 8.5 percent growth in 2022 – this would be the fastest growth among developed and emerging markets. Given this high growth and large domestic demand driven economy, there is a strong interest among global investors to participate in the country’s long-term growth prospects. This is well reflected in strong FII inflows, which were the highest ever at INR1.6 lakh crore for the year.

India witnessed the third consecutive year of normal monsoon in 2021 which is also likely to aid rural demand. Also we expect the government to press the fiscal pedal to drive growth over the next 6-12 months. Corporate India too surmounted the challenges posed by Covid with unprecedented cost containment measures and improvement in balance sheet as well as cash-flows.

As we enter Samvat 2078, corporate commentaries continue to remain upbeat, with managements across sectors alluding to strong demand trends. With the economic cycle picking up, we expect the corporate earnings growth to revive which has been lacking for many years now. We estimate Nifty EPS to grow at 35%/20% to INR730/INR874 for FY22E/FY23E, respectively.

Given the sharp rally in markets, valuations have become expensive and can be sustained only through consistent earnings delivery. Rising energy and commodity prices, disruptions in global supply chains, US Fed taper talks and hike in interest rates are some of the risk factors which can led to higher global volatility.

The long term fundamentals remain intact and thus one should adopt bottom-up strategy, as we expect stock/sector-specific momentum to continue. IT, Consumer, Cement, Capital Goods, real estate are some of the sectors which would continue to report strong numbers. Also with the opening up of the economy, we expect the travel, tourism and leisure segments to also perform well going ahead. Some of the undervalued sectors which can see some recovery in business as well as market interest are Banking and Auto.

For Samvat 2078 we expect the following key themes to play out:

1) Earnings Normalisers: With improving economy, certain pockets of the large caps are well poised to show sharp improvement in earnings

2) Travel & Tourism: With India crossing 100 crore vaccination and opening up of various sectors, we expect the Leisure segment to do very well over next 6-12 months

3) Real Estate & ancillary: We believe real estate is on the cusp of an upcycle with several macro factors supporting like low interest rates, benign prices and rising affordability coupled with low homeownership in India.

4) Long term Compounders: The pandemic has provided long term growth drivers for certain sectors like Technology (increased corporate spending), QSR (changing consumer behavior) and Insurance (low penetration and increasing awareness)

5) Mid-caps: Stock selection was the key in generating returns within the Midcap space – a trend which we believe would continue going ahead as well.

Key Financials

(Views expressed are the author’s own.)

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