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Use rallies to selectively exit consumption-driven stocks, say analysts

Despite all the downward revision in India’s gross domestic product (GDP) estimates and the fear of economic contraction, most stocks that comprise the consumer index on the National Stock Exchange (NSE) have seen a steady rise from their March 24 levels – a day before the country went into a lockdown mode to prevent the rampant spread of coronavirus. The index represents a wide spectrum of consumption – from stocks classified under the fast moving consumer goods (FMCG), automobiles, telecom, pharma, breweries and chemical sectors.
Among individual stocks that comprise this index, Bharti Airtel leads the pack with a gain of 48 per cent during the lockdown period. Mahindra & Mahindra (M&M), Britannia, Bajaj Auto, Avenue Supermarts, Hero MotoCorp, Nestle India, Zee Entertainment and United Spirits are some of the other stocks that have gained between 20 per cent – 43 per cent during this period. The Nifty50 index, on the other hand, moved up around 14 per cent during this period.

The run up in stock prices, analysts say, could be a short-term phenomenon and the up move could get sold into as employees grapple with salary cuts and job losses in the quarters ahead.

“It is difficult to pain the entire consumption theme with the same brush. There are many moving parts. The rally in since the lockdown, especially in April, was led by hope of stimulus packages and policy measures. On ground, companies are still facing production-related issues. It will be a long time before they start to operate at full capacity. Moreover, the consumption pattern / habits of people will change. All this can exert pressure on the stocks. Use rallies to exit,” advises A K Prabhakar, head of research at IDBI Capital.

Asian Paints, Hindustan Unilever (HUL), Tata Power, Voltas, TVS Motor Company and Indian Hotels are the some of the stocks that have given a negative return during the lockdown period.

“Economic recovery is expected to be slow and prolonged and vary significantly across sectors. Sectoral improvements are expected from Q3FY21 onwards, though reaching the pre-lockdown normal would probably get extended into financial year 2021-22 (FY22),” says Madan Sabnavis, chief economist at CARE Ratings.

That said, analysts remain bullish on the pharma sector despite the run up. The Indian pharma market, they suggest, was already undergoing consolidation, which has got an additional nudge due to the COVID-19 pandemic and expect the bigger companies / brands / distributors are likely to gain market share going ahead.

“The consumption basket can be divided into two parts – essentials and non-essentials. Within the essential basket, the demand for products like personal care may see a dip, while that of food group, pharmaceuticals and telecom services is likely to stay intact. People will postpone purchase of big ticket items such as cars, air conditioners etc. given the pay cuts and job losses. Investors can base their investment decision accordingly and selectively exit the consumption stocks,” says G Chokkalingam, founder and managing director at Equinomics Research. 

At a broader level, Credit Suisse expects the investor sentiment to deteriorate going ahead, as flows from foreign portfolio investors (FPIs) and domestic investors abates, led by prospects of reduced income levels and corporate profits.

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“We continue to maintain our defensive stance on Indian equities with a preference for sectors linked to agriculture, telecoms, information technology, and certain consumer and utility stocks from a three – six month perspective,” wrote Jitendra Gohil, head of India equity research at Credit Suisse Wealth Management, India in a co-authored note with Premal Kamdar.

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