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Second covid-19 wave unlikely to hurt recovery; brokerages say buy these stocks on correction

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Stock market, coronavirusStock market, coronavirusAnalysts at ICICI Securities continue to be overweight on cyclical stocks.
(Image: Reuters)

After facing the brunt of the pandemic and resultant lockdown last year, the recovery in corporate profits continues strong. Now, as the second wave of covid-19 wreaks havoc, Dalal Street is expected to witness market volatility and correction, paving the way for investors to add cyclical stocks on dips, said domestic brokerage firm Motilal Oswal in a recent note. “We believe this correction is a buying opportunity and it doesn’t change the medium-term thesis of recovery in corporate earnings led by underlying macro pick-up with focus on investment cycle,” the report said.

Volatility up; valuations to ease?

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Benchmark indices have now corrected a modest 6% from their recent highs but many stocks have undergone a heavy 15-20% decline. India VIX, the volatility gauge, has remained range-bound. Several states have announced some restrictions which are likely to hit economic activity going ahead, creating some anxiety among investors.

Correction in markets, accompanied by the earnings recovery will also bring the stretched valuations lower. “Current phase of ‘stock price consolidation’ and ‘continued earnings traction’ will result in market valuations retreating from stretched levels,” said ICICI Securities. They added that during the current phase, small-cap indices have gained 3% and mid-caps have gained 1%, significantly outperforming the benchmark NSE NIFTY50.

Top stocks to watch

Analysts at ICICI Securities continue to be overweight on cyclical stocks including banks, industrials, selectively auto, along with defensives with high dividend yield stock such as utilities. Meanwhile, those at Motilal Oswal are overweight on BFSI, IT, Metals, Cement and Neutral positions in Consumer, Auto, and Pharma while staying UW in Energy, Utilities and Infrastructure.

ICICI Bank, SBI, Ultratech, M&M, Hindalco, Titan, and SBI Cards are among the large-cap bets of Motilal Oswal. Chola, SAIL, Emami, Gland Pharma, LTTS, IEX, Varun Beverages, Gujarat Gas, Orient Electric, and Federal Bank are the top midcap bets.

Economic recovery intact

The second wave of covid-19 will only delay the economic recovery and not prevent it, according to analysts at ICICI Securities. In the United States, the second wave during the last quarter of the calendar year 2020, did not have a significant impact on the economic recovery. “We believe, India, with limited lockdowns in a few states, will show similar trends with the organised corporate sector getting impacted even less than the unorganised sectors,” ICICI Securities said. 

Working in India’s favour is the increasing pace of the vaccination drive. “Vaccination pace has increased from 10 lakh per day at the beginning of March to 38 lakh per day in April. With the approval of new vaccines, there could be a further increase in the supply of doses which can boost the vaccination rate further, in our view,” Motilal Oswal said. So far 1.39 crore people have been fully vaccinated in India and 11.1 crore have received at least one dose.

(The stock recommendations in this story are by the respective research and brokerage firms. Financial Express Online does not bear any responsibility for their investment advice. Please consult your investment advisor before investing.)

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