Markets & Covid 19 Battle Continues

Whether to invest or not in the current crisis is a question faced by most investors. However, the uncertainty is subsiding and the markets are already showing signs of bouncing back to the normal even though it would be premature and hazardous to say that the bottom has been reached. Yogesh Supekar explains how best one can build a futuristic portfolio after discounting the damages to the industry and the economy while the DSIJ Research Team share their top ‘buys’ in the current market environment.

March 2020 will forever be remembered by market participants not only because it saw the steepest fall ever in a single month, thus wiping off a gigantic amount of wealth for investors, but also for the kind of maturity that has been shown by domestic investors in India. Investors did not panic in spite of the steep sudden fall in stock prices. FPIs exited markets in March in record numbers. However, one can say that domestic investors could absorb most of the selling during such an unprecedented panic situation. This is something the investor community can take lot of positives from.

That said, if the FPI selling continues and the market finds a new bottom and continues to be dragged down slowly, it has the possibility of frustrating the investors and there could be redemption pressure in mutual funds which may further aggravate the matter. But that situation is unlikely. The most likely situation would be that we are close to the bottom and there could be a solution in front of us to tackle the virus as we head into H2. In fact, H2 may witness broad-based recovery and the stock prices may gain sensing such a recovery.

Says Alok Munot, a long-term investor: “Forget recovery and growth. In general, the stock prices may recover sharply even if the market shows signs of stabilising and consolidating. The sharp fall is too much to digest. But what this sharp fall has done is that it has created opportunities like never before.

Now it is up to us whether we can grab them and how much can we profit from them. There are too many variables to consider and it is impossible to catch the bottom. It looks to me that if I invest now it is difficult to go wrong in the equity markets.”

“I am not sure though where to invest as my favourite sector is financials, which is underperforming,” he adds. It is true that investors are finding the sharp fall tempting and are willing to take exposure even though unsure of which stocks may lead the rally. 

Investment Options
Banking and NBFC stocks have so far been the favourites of investors. Even FPIs have been bullish about the financial sector in India. We can see that the financial stocks are over-owned. Traditionally, banks and NBFCs have created huge amount of wealth for investors. However, going forward, investors will have to get used to identifying opportunities in other sectors as a change in leadership is most likely once the markets get into the recovery phase. It is possible that the automotive sector may revive considerably as an increasing number of people now prefer travelling by private cars instead of using public transport. This will in turn breathe fresh life into the automotive component sector as well. The other sectors that may step forward into the limelight could be consumer durables and real estate. With the expectation that more people will now stay at home post the pandemic, the demand for white goods and other household products may increase sharply. Paints stocks and home decor-related companies may be in focus in the coming quarters. Stocks of pharmaceuticals and FMCG companies will continue to dominate until the corona virus issue is completely resolved. Those businesses that have been impacted the most can be avoided in the coming months. For instance, stocks of retail, airline companies and hotels can be given a miss in the near future.

Viram Shah Co-Founder and CEO, Vested Finance

"Given the global impact of the corona virus, markets across the world fell over the last month. While the world is still grappling with the outbreak, China is getting back to normal life and might be the first country to restart business activity. Up to 98 per cent of major industrial companies across China have resumed operations. Although the global slowdown will impact Chinese businesses, a rebound in domestic demand would lead to improved company performances in the country. "

Interview 

Rupen Rajguru Executive Director and Head (Equity Investment and Strategy), Julius Baer India, 

What is your outlook on Indian equities and what seems the way forward considering this is a global phenomenon?

The most viral thing is ‘fear’ and that is spreading like wildfire across the globe. Uncertainty amid danger feels awful and hence it’s comforting to have strong opinions. However, having a strong opinion in a volatile, unpredictable, complex and ambiguous (VUCA) environment is dangerous. The Indian equity markets have seen a sharp sell-off in the last one month, in line with the global market performance, impacted by a multitude of such VUCA factors like the spreading of corona virus across the world and its potential impact on the world economy; the crude oil war between Saudi Arabia and Russia, which has led to a steep fall in the crude oil prices; and the Yes Bank moratorium, its rescue plan and a fear of contagion in some of the other private banks.

As the recession fears loom, the global central banks have carried out out-of-turn massive rate cuts and have also announced infusion of unprecedented liquidity in the system by way of bond buying (QE) as well as direct transfer on funds (helicopter money). Unlike in the past when most of the corrections were due to financial market excesses or economic disruptions of some sort, the current correction is driven more by risk aversion. It is extremely difficult to establish a concrete view at this juncture as to how much more can the situation aggravate, how effectively will countries respond in containing the pandemic and in how much time.

While government and central bank actions will serve as palliatives, the stock markets will want to assess the overall damage to the economic activity and demand, and this will be clear only once there is a tangible improvement in the corona virus situation. The fall in the markets has reduced the valuations of the companies far more than their value. Considering the high volumes of machine trading globally, the cuts in the prices are very sharp and stock market losses often become anxiety-fuelled, self-fulfilling prophecies. In extreme volatility like the one that we are experiencing, the markets usually overshoot on the downside.

On a positive note, in India, unlike in some of the previous cycles, the earnings cycle has been in a bottoming-out phase and not in a peak-out phase, which leads us to believe that the Indian markets should respond favourably once the dust settles, the fear subsides and human and economic activities are restored. The recent fall in oil prices is overall beneficial for India, reducing the stress on deficit and it will potentially help the government to increase its spending, while also providing legroom to the RBI to be more liberal with its monetary policy. Unlike some global central banks that have resorted to aggressive rate cuts and quantitative easing already, the RBI still has sufficient firepower which it can utilise to boost the economy and sentiment, should the need arise.

What are you advising your clients?

Investors should stay within the discipline of their asset allocation and use the market falls for portfolio rebalancing. Any excessive leveraging is best avoided at such times. In equities, we suggest buying into the dips and start with index or ETF buying, as we believe that large-cap stocks will recover first when the situation stabilises. We also suggest a barbell strategy, i.e. own a mix of high-quality growth stocks at the one end and buy beaten down ‘relative value’ or ‘mean reversion’ plays such as corporate banks, PSU companies, pharmaceutical and utilities at the other end. Besides, in sharp falls such as the one we are currently witnessing, in which both qualitative and not-so-qualitative stocks have fallen with equal intensity, it may make sense to restructure the existing equity portfolio by exiting some weaker stocks and switching to high-quality names that have become more reasonable in valuation now.

Aasif Hirani Director, Tradebulls Securities

"Bottoming out is a process and is mostly referred to in hindsight. From a valuation perspective, the ongoing catastrophe has been beneficial to bridge the gap between the value and price as most of the quality names too have had to face the wrath of the pandemic atmosphere. The market has scaled down to its value zone and is definitely presenting a good to a great opportunity for fresh folio additions.

Technically, the intensity of the decline from 12,400 seems to have been arrested as the swing recovery from 7,510 towards 9,000 was relatively faster than its decline. Also, the cool-off in volatility and risk premium is also a good sign, complementing the overall recovery process. The positive divergence on the RSI has been commendable and hence it seems that the recent swing of around 7,510 would hold for a while and needs assessments once the Nifty scales above 9,970. "

Moat Stocks
It is only logical that investors choose quality stocks with defensive business models and those businesses with strong free cash flows should be preferred. Dividend yield will become an important parameter and may look very attractive at this stage given the way the prices have fallen. Most importantly, investors can focus on those stocks that show a steady dividend growth track record. In a crisis situation like this it is important that moat stocks are identified after careful analysis.

Moat stocks usually reflect steady profit and sales growth and are industry leaders with hefty profitability margins. Their balance-sheets are strong and the companies are less leveraged.

Pharma To Continue Its Out-Performance

It is normal for the defensive stocks to outperform markets during the correction or bear markets. Pharma stocks fall in defensive stocks category hence you can expect some continued buying in the stocks. The market cap of pharma stocks in India was close to 1 lac crore in 2009, it was 10 lac crore in 2014 and now the market cap for pharma companies is not more than 5 lac crores. The valuations have come down this time around and the opportunity in front of the sector is huge. Investors can add quality pharma stocks to their portfolio.

MSCI India’s weight in EM is expected to rise by 55 basis points and India’s foreign inclusion factor is set to rise from 0.39 to 0.42, which would imply passive inflows of USD 1.3 billion and active inflows of USD 5.7 billion.

-Morgan Stanley report 

Fiscal Stimulus To Provide Support

Investors can also expect a calibrated , targeted and focused fiscal response from GOI. Globally the advanced economies have declared fiscal stimulus to the tune of 10 per cent of their respective GDP size. India is yet to announce the support to the ailing industries. Any announcement to support the industries will provide support to stock prices. This expected announcement is beyond what the RBI has already announced in terms of liquidity support and rate cuts. After Japan announced a fiscal stimulus to the tune of $1 trillion , we now have fiscal stimulus of close to $6 trillion announced by various governments. At some point of time the free flowing money will find home in the form of equities. Also investors should not ignore the positive development happening in the world of oil markets. Crude oil is expected to recover from its current levels when the Saudi Arabia and Russia sit across the table and end the price war. 

Caution warranted

The current pandemic has led to erosion of $18 trillion of global equities. Almost $62 billions have been withdrawn from the emerging markets and that is nearly double the amount of outflows seen during the global financial crisis.

As the solution to the problem i.e covid 19 is not insight there is always a chance that markets witness another round of sell-off. Market sentiment will improve as a series of good news starts coming from various countries on the spread of Covid-19 Caution Is Warranted Till Then. 

Conclusion

The current crisis is expected to reset the world order and several aspects of normal life are expected to change once we are out of the woods. The change in preference is going to impact the profitability of companies and hence the portfolio returns. While we may see sweeping powers in the hands of the world leaders post the current crisis, another trend that is important for investors is the emergence of the healthcare sector. There will be more than enough thought on reforming the healthcare sector in India and it goes without saying that there will be ample investment opportunities in this field.

The trick for any investor going forward will be to identify the sectors that may lead from the front when the markets and economy recover. Those sectors that are least impacted due to lockdown may provide leadership in the short to medium term, such as telecom. The current fall in markets can be attributed to the crude oil price war and the pandemic. So it is logical to expect swift recovery once these two issues are resolved. With members of the Organization of Petroleum Exporting Companies (OPEC) planning to meet and come to a common understanding on the cut in oil production, crude oil problems may find a resolution.

Whether markets form a durable bottom will be an offshoot of the news emerging from the medical fraternity. Meanwhile, the valuations are looking extremely attractive for long-term investors. This could be the most appropriate time to start accumulating stocks and build a portfolio of moat stocks that are expected to take the lead when the market recovers. In our view, the following stocks may outperform the markets in the coming quarters: 

Divis Laboratories CMP (Rs.) : 2064.80

BSE Code : 532488 I Face Value (Rs.) : 2 I Mcap FF (Cr.) : 27,874.84 I 52 Week High / Low : Rs.2,258.00 / 1,466.95

Here is Why
☛ Growth in generic medicine
☛ Company to benefit from the current situation
☛ Reduced debt

Divis Laboratories Limited (Divis Labs) is engaged in the manufacturing and sale of active pharmaceutical ingredients (APIs) and intermediates. The company’s geographical segments include India (sales to customers within India) and other countries (sales to customers outside India). Its main products include generic APIs, intermediates, peptide building blocks and carotenoids. Divis Labs is also involved in developing alternate, non-infringing processes for APIs for the inventors to manage late lifecycle and generic drug manufacturers.

Taking into account the quarterly trend, on a consolidated basis the net sales for Q3FY20 increased by 2.67 per cent to Rs.1,396.26 crore from Rs.1,359.96 crore for Q3FY19. The PBDT for Q3FY20 was reported to be Rs.534.02 crore, which is a decrease of 5.45 per cent when compared Rs.564.78 crore reported for Q3FY19. The company gained a net profit of Rs.359.09 crore in Q3FY20, contracting by 7.78 per cent from Rs.389.38 crore gained in Q3FY19. On the annual front, the net sales were reported to be Rs.4,946.26 crore for FY19, thus clocking a growth of 26.41 per cent when compared to Rs.3,912.78 crore for FY18. In FY19, PBDT also increased by 47.32 per cent to Rs.2023.97 crore from Rs.1373.82 crore for FY18. The company gained a net profit of Rs.1,352.27 crore for FY19, which is an increase by 54.24 per cent from Rs.877.01 crore gained in FY18.

Since Divis Labs is global player of life-saving active pharmaceutical ingredients (APIs), the company has the potential to emerge as the largest beneficiary of preventive vaccine of Covid-19 due to its large share of business in Europe and other regulated markets in North America. The permanent vaccine would take nearly 18 months to come to any positive conclusion and its effectiveness. Researchers have started working with already available and proven resources to cater to the near future needs for combating the spread of coronavirus. Hence, use of alternatives can bring about a spike in demand. Divis Labs contributes in products such as Naproxen, Dextromethorphan and Gabapentin which have significant importance in generic medicine. A jump in the demand for these is expected in the future.

The large market-share of Divis Labs in Europe and North America can benefit the company for assisting in combating the coronavirus in these regions. The capex used for increasing its manufacturing capacities and also to upgrade utilities in generic medicine can also come in handy for the company. Divis Labs recently announced through a press release to the stock exchanges that it would continue to operate in a planned manner despite the operational restraints due to Covid-19 so that supply of essentials was not affected. This is expected to cause lesser impact on the company’s financials for the recent and as well as the next few quarters.

Hence, we recommend a BUY. 

Hindustan Unilever CMP (Rs.) : 2444.60

BSE Code : 500696 I Face Value (Rs.) : 1 I Mcap FF (Cr.) : 1,80,957.16 I 52 Week High / Low : Rs.2,614.00 / 1,657.00 

Here is Why
☛A rise in demand for hygiene products
☛Expansion of product portfolio
☛ Expected growth in FMCG sector 

Hindustan Unilever Limited (HUL) is an India-based consumer goods company. The company’s consumer goods business comprises home and personal care, foods and refreshments. Its business segments are home care which includes detergent bars, detergent powders, detergent liquids, scourers and water business; beauty and personal care which consists of products in the categories of oral care, skin care , hair care, deodorants, talcum powder, colour cosmetics and salon services; foods and refreshment which includes staples, culinary products, tea, coffee and frozen desserts. Its other business activities include exports and infant care products. HUL also provides health food drinks such as Horlicks, Boost, Maltova and Viva.

Considering the quarterly trends on a consolidated basis, for Q3FY20 the company reported net sales of Rs.9,978 crore which is an increase of 3.81 per cent as compared to net sales of Rs. 9,612 crore for the same quarter of the previous fiscal. Its PBDT also expanded by 19.44 per cent for Q3FY20 and was around Rs.2,507 crore as compared to Rs.2,099 crore for Q3FY19. For the third quarter of FY19 the net profit rose by 12.95 per cent to Rs.1631 crore when compared to Rs.1,444 crore in the third quarter of the previous fiscal. In terms of annual results, net sales saw an increase of 8.75 per cent to Rs.38,684 crore in FY19 from Rs.35,571 crore in FY18. The company posted a PBDT of Rs.9,169 crore in FY19, which is an increase of 17.19 per cent compared to Rs.7,824 crore in FY18. On the other hand, the company gained net profit of Rs.6,060 crore in FY19, clocking a growth of 15.94 per cent compared to Rs.5,227 crore gained in FY18.

There is a strong pick-up in demand for hygiene products like soaps, hand wash, sanitizers, floor cleaners, etc. due to the coronavirus pandemic. HUL is ramping up production of hygiene-related products which would be beneficial to the company in the upcoming months. It is introducing a maximum range of new generation products such as hand wash, body and face wash, hair-conditioners, green tea and liquid detergents.

The company has an efficient supply chain and focuses on digital and analytics for distribution and sales. There has not been much business or supply disruption due to Covid-19 so far. Thus, business impact will be limited. Recently, HUL acquired ‘VWash’ brand from Glenmark which is positive news although it is unlikely to have any material impact on the numbers in the near term. HUL will use its marketing and distribution synergies to drive growth in this segment across most metros, Tier II and III cities and develop the markets. With HUL’s extensive distribution reach of 7+ million outlets and direct distribution of 3.5+ million retail outlets, it is believed that HUL would be able to market VWash on a much wider scale across geographies. The personal wash category is likely to see strong growth in the upcoming few quarters.

We recommend our investor-readers to BUY.

IPCA Laboratories CMP (Rs.) : 1524.15

SE Code : 524494 I Face Value (Rs.) : 2 I Mcap FF (Cr.) : 11,051.69 I 52 Week High / Low : Rs.1,821.00 / 844.20 

Here is Why
☛Pharma sector to benefit from the current COVID-19 crisis
☛ More focus on non-US markets 

IPCA Laboratories Limited is engaged in the pharmaceuticals business. The company is a manufacturer and supplier of over 10 active pharmaceutical ingredients (APIs). It offers APIs, such as Atenolol, Hydroxychloroquine Sulfate, Morantel Citrate, Pyrantel Pamoate and Zaltoprofen. The company has brands such as Zerodol, Lariago, HCQS Perinorm, Rapither, Tenoric, Lumerax, Etova, Malirid and Folitrax. Its 3C division focuses on cardiovascular and anti-diabetic markets. Its 3D division is focused on cardio-diabetic market. The company’s Activa division serves the rheumatology market. Its Altus division caters to the needs of intensivists, both surgical and non-surgical. Its Bionova division’s focus area is dermatology whereas the Dynamix division focuses on cardiovascular, gastro-intestinal, anti-bacterial, pain management and respiratory sectors. Its Hycare division caters to the needs of cardiologists and diabetologists. The company’s other divisions also include Innova, Intima, pain management, pharmaceuticals and urological science.

Looking at the quarterly trends on a consolidated basis, for Q3FY20 the company reported net sales of Rs.1,212.86 crore, an increase of 20.55 per cent as against net sales of Rs.1,006.14 crore for the same quarter of the previous fiscal. PBDT also increased by 18.58 per cent for Q3FY20 and was Rs.287.78 crore as compared to Rs.242.68 crore for Q3FY19. For the third quarter of FY19 the net profit also increased by 25.41 per cent to Rs.200.06 crore when compared to Rs.159.52 crore in the third quarter of the previous fiscal year. In terms of annual results, net sales saw an increase of 14.91 per cent to Rs.3,773.18 crore in FY19 from Rs.3,283.57 crore in FY18.

The company reported PBDT of Rs.730.69 crore in FY19, which is an increase of 54.65 per cent compared to Rs.472.49 crore in FY18. On the other hand, the company gained net profit of Rs.444.03 crore in FY19, which is a growth of 82.24 per cent compared to Rs.243.65 crore gained in FY18. 

IPCA’s leading brand Zerodol has been growing in double digits. Recently, USFDA has made an exception to the import alert for the company’s Hydroxychloroquine Sulphate and Chloroquine Phosphate APls produced at the company’s APls manufacturing unit. IPCA Laboratories is amongst the largest manufacturers vertically integrated with capacities and capabilities for manufacturing the above mentioned APls and its formulations.

The company in its filing to the exchanges said that credible articles, reports and research papers showed the efficacy of the drugs for prophylactic use as well as for treating Covid-19. As a part of its new growth path, the company intends to focus more on the non-US markets and especially in global tender businesses in EU generics. Its focus on India formulations with reduced focus on revenues from US is expected to reduce the company’s exposure to regulatory risk as it will be minimum with limited downsides from USFDA and thus bringing higher growth and margins for the company.

Thus, we recommend a BUY. 

(Closing price as of Apr 07, 2020)