HDFC Securities, in a recent report, said that Nifty50 (except-financials) is back to pre-COVID peak levels with overall Nifty valuations back at 18x FY22 PE. While earnings are difficult to predict near term, it remains to be seen if consensus can be right in FY21/FY22 after 6 consecutive years of significant overestimation, noted the brokerage. It added that key swing sectors from the overall earnings picture remain the same. Energy and Financials which disappointed in FY20 are likely to remain so in FY21.
As per the brokerage, with recent run-up back to pre-COVID levels for most sectors, risk-reward has again turned unfavorable with limited upsides except in financials, infra, and metals where recovery could take longer.
As its market strategy, the brokerage maintains a mix of defensives (Telecom, IT, pharma, utilities), quality cyclical (select banks, cement, autos, infra, consumer discretionary) with a positive bias towards technology (Telecom, IT) and manufacturing led gradual economic recovery.
Among sectors, it prefers Telecom, IT, Chemicals, Pharma, Insurance, large banks, Cement, Gas. Meanwhile, it is underweight on Consumer staples, discretionary, Autos, Metals, Oil, NBFC.
It also tweaked its model portfolio in July with a minor cut in weights for Retail, Cement, NBFC’s, Pharma while adding weights in IT, Insurance, Consumer appliances.
Among stocks, the brokerage introduced Mphasis, Max Life, and Crompton Consumer to its portfolio.
Top large-cap picks in HDFC's model portfolio include RIL, Bharti, Infosys, ITC, SBI Life, ICICI Bank, Axis Bank, L&T. Within mid-caps, it likes Max Life, IGL, Gujarat Gas, Crompton Consumer, Alkyl Amines, Galaxy Surfactants, JK Cement, KNR Construction.
On the earnings front, the brokerage still sees downside risks to its FY21 and FY22 estimates and expects a high likelihood of further cuts to FY21 and FY22 earnings over the next 6-12 months.
"Q4FY20 saw a severe impact on earnings given COVID lockdown impact and
commodity price collapse in March. Earnings misses were highest in Financials, consumer discretionary, and Energy sector. While FY21
earnings decline is a given, 15 percent EPS CAGR over FY20-22 on aggregate basis looks optimistic to us," the report mentioned.
