With improving macroeconomic environment and government as well as private CAPEX picking pace, cyclical and CAPEX-oriented plays are finding favours from the investors.
According to the brokerage firm Motilal Oswal Financial Services, the market in the last three months has witnessed a sharp outperformance in cyclicals like BFSI, auto, and infra, while safe-havens like FMCG, IT,
and pharma underperformed.
“Q3FY21 earnings are being driven by cyclicals. With management commentary suggesting a pick-up in capex and capacity utilization, and the Budget providing a boost to CAPEX, cyclicals and CAPEX-oriented plays can remain in favour,” said Motilal Oswal.
Momentum to continue
Jyoti Roy – DVP- Equity Strategist, Angel Broking pointed out with no second wave of Covid-19 in India, unlike developed economies most parts of the Indian economy is back to pre-Covid levels. As a result, there has been a shift in flows from defensive sectors like pharma and IT to cyclical sectors.
“Going forward, we believe that cyclical sectors will keep outperforming the Nifty as the economic recovery continues to gather steam,” Roy said.
Cyclicals have been outperforming in the last three months due to the continued improvement in the underlying economy which is reflected in high-frequency indicators like PMI and auto sales numbers.
“The calendar year 2021 belongs to the economy-driven and cyclical sectors because of the V-shaped recovery being seen in the economy. The Indian economy may be on the verge of a multi-year investment cycle similar to the 2003-11 cycle given positive drivers in both household and private sector segments,” said Rusmik Oza, Executive Vice President & Head of Fundamental Research at Kotak Securities.
“A combination of plentiful and cheap capital, recent labour reforms, low taxation rates, PLI schemes and changes in customs duty may kickstart the flagging private sector investment cycle,” Oza said.
Oza pointed out that the March 2021 quarter earnings of Nifty50, as per Bloomberg estimates, is expected to go up by about 60 percent, followed by about 80 percent growth in June 2021 quarter and about 40 percent growth in September 2021 quarter.
This will lead to back-to-back four quarters of amazing results and earnings growth mainly led by economy-driven and cyclical stocks, Oza said.
Siddharth Sedani, Vice President, Equity Advisory, Anand Rathi Shares and Stock Brokers, is positive on sectors that are closely linked to the economy like banks, capital goods, infrastructure, metals & mining, etc.
“The Budget, along with strong corporate commentary, reaffirms the positive long-term structure of the market. The market momentum is likely to continue with the focus now back to fundamentals like corporate earnings. A combination of positive sentiment, positive FII flows and very healthy earnings could keep markets at elevated levels in the near future,” Sedani said.
Stocks to buy
Roy of Angel Broking is positive on the infrastructure and capital goods sector, given the increased allocation to capital spending for FY21 in the Union Budget 2021.
In the construction space, he is positive about PNC Infratech as it has a strong order book and proven execution capabilities.
In the capital goods, he likes Carborundum Universal which has posted strong Q3 numbers due to strong improving demand from end-user industries like auto, cement and steel.
In the auto space, he prefers Ashok Leyland which is going to be the biggest beneficiary of the vehicle scrappage plan proposed by the government.
“We also like NRB Bearings in the auto ancillary space which we believe is one of the best plays on the auto story given its wide product portfolio,” said Roy who is positive on the cement space also as the demand for cement is expected to be robust driven by both housing and infrastructure sector.
Sedani of Anand Rathi suggests buying Sanghi Industries (target: Rs 50), UltraTech Cement (target: Rs 6,070), Birla Corp (target: Rs 1,039), Karnataka Bank (target: Rs 85) and Polycab (target: Rs 1,539).
Oza of Kotak Securities believes a few sectors and pockets that can make money for investors given their past underperformance and potential recovery are banks, capital goods, construction, engineering, oil & gas, cement, real estate & metals.
He suggests buying L&T (target: Rs 1,720), CESC (target: Rs 815), Hindalco Industries (target: Rs 375), Escorts (target: Rs 1,700) and Dalmia Bharat (target: Rs 1,500).
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