“A fall in commodity prices is the key negative for metals, upstream oil companies, gas distributors with long-term contracts, refiners (lower refining margin). Port and logistic companies are likely to be impacted by a fall in trade traffic. Supply chain disruptions are likely to affect pharma, autos and capital goods due to supply shortages and/or price increases,” the Nomura
On the other hand, a fall in crude oil prices is positive for consumer, paints and cement sectors as it will lower their input / production costs. Sectors such as tiles, textiles, chemicals and APIs also stand chance to gain market share from their Chinese competitors. These sectors, according to Nomura, constitute 8-10 per cent of FY21 Nifty EPS consensus estimates.
Meanwhile, most companies had built up inventories before the Chinese New Year holidays and these inventories are expected to last for one-three months.
“The feedback from companies on the gradual resumption of supplies from China is comforting. However, over the next 15-30 days we do expect some concerns to emanate as inventories deplete and supplies are not fully restored. We expect the impact of supply disruptions to play out more prominently in the first quarter of FY21 (Q1FY21F). These adversely impacted sectors constitute 30 - 35 per cent of FY21 NIFTY EPS consensus estimates, in our assessment," Mukherjee and Sahu wrote.
In this backdrop, Nomura
remains bullish on the road ahead for Indian equities and suggests the recent fall be utilised as an opportunity to accumulate stocks. Among sectors, the brokerage remains positive on private banks (a beneficiary of market share gains, liquidity and lower rates), infrastructure, cement (investment-led growth) and healthcare.
“The valuations have corrected and the Nifty is now trading at 16.5x one-year forward earnings, the lowest in the past five months. The spread between earnings yield and bond yield has expanded to three-year high. Beyond the current risk-off, we expect supportive monetary policy and lower yields will support market valuations," the Nomura report said.
Sectoral breakdown of key imports from China