Nifty Dec 2021 target seen at 16,100, down 6% from previous target; discretionary, autos under pressure

With the acceleration in digitisation initiatives undertaken by the Indian companies, the IT sector will be unaffected by the domestic challenges. Image: Reuters

The second COVID-19 wave has proven to be more dangerous with India reporting over 3 lakh cases per day. The market has been witnessing a significant correction on the back of rising cases and re-imposed lockdown-like measures and strict restrictions across states. Axis Securities has revised down its Nifty’s December target by 6 per cent to 16,100 from 17,200 previously. In the wake of COVID-19 challenges, the government has proactively started undertaking measures to open up the immunisation program to cover a broader age group from 18 to 45 year old from May 1, 2021. Analysts at Axis Securities say that this has brought some clarity that the COVID-19 will likely get over in a finite time frame of next 6 months. “In this scenario, it is critical to assess the damage inflicted by the second wave on various sectors as well as on the corporate earnings as these factors most critically impact the market returns and valuations,” said Naveen Kulkarni, Chief Investment Officer, Axis Securities.

Basing the sensitivity analysis of the virus spread and the duration of lockdown, Kulkarni has estimated the FY22 earnings for Nifty 50 to decline by 6-16 per cent in the base to the bearish case scenario. This means FY22 earnings are likely to be in a band of 575 to 650 which still implies growth on FY21 levels. “While this is not a doomsday scenario, it does indicate that a few sectors will underperform in the near to medium term while the other few will outperform,” the brokerage firm said.

Discretionary consumption, autos to be severely impacted

Maharashtra, which contributes 14 per cent of India’s GDP, has announced the most stringent measures by far as the state has the highest number of cases. Due to this, sectors related to travel, tourism, restaurants, small ticket discretionary and many others will be severely impacted. The brokerage firm believes that while there are not many listed plays in small ticket discretionary consumption like restaurants, all these will impact the BFSI sector as it is a lender to the SME and MSME segment. Similarly, the auto sector is expected to bear the brunt of closed showrooms and lower capacity utilisation. The profitability of the auto sector is likely to remain under pressure in 2021.

IT, Pharma, Consumer staples, Rural set to outperform

With the acceleration in digitisation initiatives undertaken by the Indian companies, the IT sector will be unaffected by the domestic challenges. The sector will also benefit from a stronger Dollar. Amid on-going vaccination drive and roll out of more COVID-19 vaccines, the pharmaceuticals sector is likely to outperform and benefit from the domestic challenges and see an earnings upgrade in the next 3 months. “Dr Reddy’s and Gland Pharma are likely to benefit from the roll-out of Sputnik which has been recently approved by the government,” the brokerage firm added. Naveen Kulkarni also sees that consumer staples are also likely to see their growth trajectory unchanged as food companies experience a positive impact. Moreover, rural will continue to do well as the last cycle also indicated that the pandemic impact was lower than its urban counterparts.

Nifty December target seen at 16,100

Metal prices have continued to surge during the second COVID-19 wave globally. Similarly, other commodities have also continued to rise. The domestic brokerage firm also said that even though the cyclical plays such as cement and capital goods may see some disruption in demand intermittently, the demand surge post the pandemic is very likely. It sees cyclical space as well placed to outperform during these challenges. Axis Securities noted that the impact on the market will be significant but there are enough structural plays that offer long-term earnings visibility. These should be accumulated during the current fall as they will deliver strong earnings growth and could see higher allocation in the short term. “We remain cautiously optimistic on the equity markets and believe this to be a time to add and not panic,” it added.

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