Friday, April 3, 2020

'Asian Paints, Britannia may become the biggest wealth creators after COVID-19'

We had suggested increasing the mix of quality mid & small cap at the start of the year based on a promising outlook for 2020. This is unlikely to happen soon as the economy will have to bear a recession.

Focus on domestic-oriented companies, businesses that stay safe and flourish during and after challenges. Solid business model and brands which are leaders in industry, products or niche segment, Vinod Nair, Head of Research at Geojit Financial Services, said in an interview with Kavart Media.

Q) After an unforgettable March, do you think markets will be able to bounce back given the measures introduced by the govt?
A) To bounce back we need to see the number of infected cases coming down. In the near-term, the market may reverse from a sharp bounce led by huge fiscal and monetary measures announced.
These measures will not be able to pick-up the economy in the short-term unless we see successful lockdown and reduction in the spread of COVID-19.
Q) After registering a series on series fall of more than 25 percent in March, what do you expect from April series? Any stocks which investors should watch/avoid? Also, have we made a bottom around 7,511?
A) The data suggests that we have entered a recession phase and the stock prices have factored that. This stock market trend will continue to be challenging if the risk of recession remains after the 21-day lockdown.
If the lockdown of 21-Days in India becomes successful and the domestic market opens then the second half of April will be promising. At the same time, recovery from a global lockdown will be encouraging.
Q) What is your take on the government and RBI package?
A) Assuming that this health problem will be around more than three months, the total size of the fiscal, as well as monetary stimulus, is good enough as it accounts to about 4 percent of India's GDP.
The scheme has factored free food, an increase in cash in hand, job safety, loan, and various steps. The RBI announced monetary stimulus to increase financial liquidity and reduce risk in the system by providing a huge cut in interest rate and cash reserve ratio, moratorium and working capital interest deferment for three months, OMO and other relaxation which will provide liquidity of 3.2 percent of GDP, which is massive.
At the same time, the global economy needs to recover in those three months, else we are in a challenging situation.
Q) Which are the sectors that are likely to get impacted the most positively post the implementation of the stimulus package?
A) This will be positive for defensive and staple business like FMCG, given the support to the rural and semi-rural economy. Banks will also benefit from the relaxation in the classification of NPA, higher incomes and reduction in interest cost. In general, any business that focuses on the domestic economy will benefit.
Q) Which stock can turn out to be big wealth creators post the COVID-19 led selloff and stimulus package?
A) Here is a list of top three stocks which could turn out to be the biggest wealth creators:
Asian Paint:
Business operations are largely domestic and on account of the sharp fall in crude oil prices, the cost of the key raw materials has come down which would result in a significant improvement in margins for paint companies.
Furthermore, the companies are likely to pass the benefit to customers to set the brush for a revival in demand. Rising urbanisation and the government's stimulus measures will help to increase demand in the long term.
Britannia Industries:
The packaged food (biscuit) industry is currently facing supply chain issues rather than demand issues due to lock down on account of COVID-19 pandemic.
Once the situation stabilises, we believe Britannia would be one of the major beneficiary considering the factors such as essential food category products, negligible dependence on exports (6%), strong distribution network (55 lakh outlets), negligible debt (D/E of 0.04x) & good cash position (Rs850 crore as on FY19) and strong return ratios (RoE of 24% and RoCE of 29% as on FY19).
HDFC Bank:
It is at a sweet spot with almost no balance sheet stress unlike its competitors with good asset quality, lower exposure to stressed corporate lenders and low NPA below 0.5. Strong digital capabilities and high exposure in semi-urban and rural segments to add profitability once the economy is back to normalcy with CAR of 18.5.
Q) What checklist should investors follow in a bearish scenario?
A) Focus on domestic-oriented companies, businesses that stay safe and flourish during and after challenges. Solid business model and brands which are leaders in industry, products or niche segment.
Healthy track record of existence and ability to flourish under any cycle of the economy. Solid cash flow generation and lucrative dividend pay-out. A healthy balance sheet with zero/negligible net-debt.
Credible management, no pledging and strong shareholding of recognised institutions. Attractive valuation and parameters like business growth, margin, RoE, and RoI.
Q) Should investors rejig their asset allocation in these troubled times? If yes, what do you recommend?

A) We had suggested increasing the mix of quality mid and smallcap at the start of the year based on a promising outlook for 2020. This is unlikely to happen anytime soon as the economy will have to suffer a recession.
Given the change in view, we suggest allocation of 30 percent for top private banks, top NBFCs and PSUB (not more than 5 finance stocks). The next 25 percent should be on consumption, chemicals and pharma.
Rest could be stock specific with a focus on IT, companies with management credentials, clean fundamentals, dividend history and a healthy business outlook with leadership qualities. Spread your investment in time, stocks and sectors.
Stick with quality stocks having leadership in sector, products or niche segment. Don’t be lured by low prices like new lows, 52-week low or a bounce in price during such consolidation period. Capitulation is not an opportunity to buy any type of stock.

No comments:

Post a Comment