Q1 review: Strong IT & telecom show, growing market share of private banks indicate big becoming bigger

IT has emerged as the clear winner coming out almost unhurt from the lockdown.

 

Q1 results indicate clear trends for investors

After the sharp bounce back from March lows, stock markets globally are in a high-valuation zone. Nifty at 11,000 is trading at a trailing PE of around 26, which under normal conditions would be described as bubble valuation.

But these are not normal times as unprecedented liquidity and historically low-interest rates can support high valuations, but a reversion to mean is inevitable and therefore investors should focus on earnings support to valuations. Do the earnings, present and potential, support the valuations?

Let’s take cues from the Q1 results:

IT is the clear winner

IT has emerged as the clear winner coming out almost unhurt from the lockdown. With work-from-home at more than 95 percent, all the big boys gained from robust demand from clients.

The move to cloud and automation has gathered momentum in the COVID-struck world. Even though all IT majors have done well, Infosys has broken out from the herd with a clear beat over market estimates on revenue and profits.

Second rung IT companies also have shown similar positive trends. The market has been quick to discount the standout performance with the IT index gaining a whopping 22 percent in July. IT is likely to remain resilient, going forward.

Telecom is riding the lockdown wave

The sector that converted the crisis into opportunity is telecom. Aided by increasing work-from-home (WFH) and exploding data consumption, telecom is riding the COVID-19 wave. Since telecom is now a near duopoly market, Reliance Industries and Bharti Airtel are the clear winners.

RIL stands out with a smart 7 percent spurt in ARPUs. With WFH becoming the new normal for many businesses like IT, the prospects for the sector are, indeed, bright.

Darwinism in the market: Fittest will survive and grow

A clear trend in these turbulent and disruptive times is 'the big growing bigger and better'. Large private companies/market leaders are gaining market share at the expense of weaker players.

A good example is HDFC Bank, which has reported 20.9 percent increase in deposits and 24.6 percent increase in loan disbursements in Q1. PSU banks constrained by capital adequacy are clear laggards. Midcap banking stocks are struggling. The phenomenon of big growing bigger is clearly pronounced in segments like telecom, FMCG, paints, banking and NBFCs.

Cement industry surprised both on price and volume front

Cement industry has surprised with smart improvement in price and volume. Robust rural demand has helped the industry substantially. Even though most companies have reported good numbers, the largecap UltraTech has come out with strong numbers beating the street.

Pharma, healing the sick, benefits from the pandemic

Pharma index, up by 13 percent in July alone, is a winner in COVID-19 times. Most companies, large and small, have reported good numbers. Aurobindo Pharma stock, surging 180 percent from the March lows, stole the show in an impressive performance by the industry.

FMCG in slowdown mode

Even though FMCG has done reasonably well with people stocking up during the lockdown, demand is likely to remain subdued, going forward. Q1 results of Britannia and Nestle stood out in the segment. However, a contracting economy, rising unemployment and falling incomes do not bode well for the sector in FY21.

Autos, after the sudden brake, is slowly accelerating

Maruti's first quarterly loss since 2001 is a reflection of the pain inflicted by the lockdown on the auto industry. But the prospects of the car industry and 2-wheelers are set to improve aided by the increasing preference for private mobility. Q2 numbers will provide evidence of this trend and the market is already discounting this.

Though many results are yet to come, the main takeaways are the stellar performance of IT, the robust show of telecom, the growing market share of private sector banks and, broadly, the phenomenon of the big becoming bigger.

The author is Chief Investment Strategist at Geojit Financial Services.

Source - Moneycontrol.com