Monthly Equity Strategy 8 April 2020

“A glass little full and largely empty”, the equity valuations look attractive though global & domestic economic
outlook appears gloomy, the path to global economic recovery seems damaged, India not immune - Stay on sidelines
 The coronavirus pandemic is a health and economic crisis which is straining the world’s financial system. The virus has
infected over 14,32,373 people around the world and killed 82,114. Efforts to contain the spread of the disease have
resulted in severe shocks to both supply and demand around the world, rippling through to the financial sector. As the
pandemic rips through countries, it is overturning everything in the global economy from equity/ bonds, to prices for daily
needs. The adoption of proven public health measures, such as social distancing, to physically disrupt the contagion has
severely disrupted the flow of goods and people, stalled economies and put a considerable ridge in gross domestic
product for months to come. The global economic contagion is spreading as fast as the disease itself. The response from
central banks and governments across the globe is likely to provide some support however the global economic recovery
will depend on how soon the pandemic gets defeated.
 Following the globally adopted measures, on March 24, 2020, the Indian government too announced a nationwide
lockdown for 21 days to control the virus spread. Though necessary but for an economy going through demand
compression, growing unemployment, and declining industrial output and profits for several quarters, supply-side
restriction could have severe impact, risking growth prospects and social /economic well-being of a large population. The
nation’s GDP has consistently fallen since 4Q’FY18 except for 4Q’FY19. The uptrend in 4Q’FY19 GDP was attributable to
downward revisions to growth rates in first 3 quarters of FY19 by National Statistical Office (NSO). (From 8% to 7.1% for
1Q; from 7% to 6.2% in 2Q and 6.6% to 5.6% in 3Q). According to latest data from CMIE, the contraction in FY20 is
12.9%, worse than the 6% contraction registered in 2008-09, following the global liquidity crisis. From manufacturing to
mining, construction to electricity, every major sector reported a contraction in gross value added. The impact of a
complete social and economic shutdown is difficult to quantify, however it is likely to be as deep or more than 2016
demonetization or the 2017 GST roll out. The global rating agency Moody's recently reduced its estimate of India's GDP
growth for CY 2020 to 2.5% from previous estimate of 5.3%, quoting rising economic cost of the coronavirus pandemic.
 To maintain stability in the financial system Reserve Bank of India (RBI) announced to inject ~₹3.7 lakh crore liquidity into
the system through various measures in addition to ₹2.8 lakh crore already injected. According to RBI, put together these
liquidity measures account for 3.2% of the Nation’s GDP. As part of liquidity infusion measures, the central bank
announced 75 basis points cut in repo rates, 90 basis points cuts in reverse repo rate and 100 basis points reduction in
CRR for banks. The RBI also permitted banks, lending institutions to allow a 3 month moratorium on all loans and defer
interest on working capital repayments by 3 months. RBI expects these measures to ease the pain in domestic economy,
have better control on the liquidity situation and mitigate the negative effect of COVID-19 on the economy.
 The increasing fatalities and diseased cases globally due to COVID-19 have spoiled market sentiment since mid February
2020. The key global indices such as Dow, S&P, FTSE, CAC 40, and DAX ended the month of March 2020 with a cut of -
14%, -13%, -14%, -17% and -16% respectively. While Asian markets lost around ~-13%. The Indian stock markets too
drifted down with benchmark Nifty & Sensex losing -23% each respectively during the month of March 2020. As the
coronavirus pandemic is triggering fears of a global recession, foreign investors have started paddling back from the
Indian capital markets by withdrawing a massive over ₹1 lakh crore in March 2020 alone.
 “There comes a point when you stand in the rain and you get so wet, you can’t get any wetter” In our view the current
situation resembles the same. In these testing times we advise the investors to be patient and remain invested in quality
stocks with proven track record, quality management & strong balance sheet position. The Nifty 50 at current P/E trading
multiple of 16.9x 12m forward earnings compared to 5 year historic average of 22.5x, looks attractive, however accurately
estimating the potential earnings damage & timing the economic recovery, remains a challenge. Given the efforts
governments across the globe are making, we believe that the virus will eventually be contained however timing the same
today is quiet difficult. We suggest investors to start accumulating quality stocks on each decline in small quantities.
Key global developments
 The number of infections around the world is near 1.5mn while in the US, the most affected country in the globe, rose
above 400K. Meantime, the Trump administration and the Congress are preparing a fourth stimulus package to fight the
spread of the coronavirus and lift the US economy. The Fed announced a temporary lending facility agreement for central
banks, aiming to provide an alternative source of US dollars. Considering the 1st quarter of the year, the Dow Jones is
down more than 21% and is on pace to book its worst quarter since 1987; the S&P 500 is down near 18%, the worst since
2008; and the Nasdaq is off near 13%.
 The coronavirus outbreak could cost the global economy up to $2 trillion this year, the UN's trade and development
agency said; warning that shock from the epidemic will cause a recession in some countries and depress global annual
growth to below 2.5%.
 The European Central Bank approved fresh stimulus measures to help the bloc cope with the "major shock" of
coronavirus but left interest rates on hold, dismaying markets, and said euro zone governments must lead the pandemic
response. The ECB said it would roll out cheap loans for banks, at an interest rate as low as minus 0.75%, and step up
bond purchases by a total of 120 billion euros through the end of the year.
 The coronavirus economic relief bill will include a one-time $1,500 payment for families and allow the Federal Reserve to
leverage up to $4 trillion of liquidity to support the nation’s economy. Measures include the provision of up to $300 billion
in new financing for employers, consumers, and businesses; continuing purchase Treasury securities and agency
mortgage-backed securities in the amounts needed to support smooth market functioning; purchases of agency
commercial MBS
 On March 15th, the Fed lowered the target range for its federal funds rate by 100bps to 0-0.25% and launched a massive
$700 billion quantitative easing program during an emergency move.
 China’s base rate for new bank loans was unexpectedly unchanged in March, indicating pressure on lenders’ margins
and prompting calls for further cuts to policy rates.
 The IHS Markit US Services PMI plummeted to 39.1 in March 2020, missing market consensus of 42 and signalling the
fastest contraction in business activity since comparable series began over a decade ago, a preliminary estimate showed.
New business decreased by the most since late-2009, as both domestic and foreign client demand weakened hurt by the
coronavirus outbreak.
 The number of Americans filing for unemployment benefits jumped to 3.28 million in the week ended March 21st, the
highest since the series began in 1967 and well above expectations of 1 million.
 WTI crude prices steadied above $20 per barrel after US President Donald Trump and Russian President Vladimir Putin
agreed to talks aimed at stabilizing oil markets. Still, WTI futures have plunged more than 66% for the first quarter, putting
the benchmark on track to register its worst quarter ever, pressured on both demand and supply sides. Travel restrictions
and city lock-downs around the world to prevent a further spread of COVID-19 could last months have deepened
concerns over oil demand. Also, a race to win market share between Saudi Arabia and Russia after the collapse of OPEC
dragged prices to their lowest in eighteen years.
 The FTSE 100 lost 25% in the first quarter, suffering its worst drop since October-December 1987 and its second worst
decline ever. French stocks lost 17.2% during March and dropped 26.5% considering the whole of 1Q, the worst quarterly
drop since 2000.The DAX 30 lost more than 15% in March alone, its worst month since 2011, and dropped 26% in the
first quarter as a whole, its worst quarter since 2002.
Key sector developments
 BFSI: In an already slowing economy the additional pressures created by pandemic and subsequent lockdown is likely
to result in deterioration of bank’s asset quality across corporate, small and medium enterprises (SME) and retail
segments. This is likely to put significant pressure on profitability and capital for lenders, in addition the growing risk
aversion in the system following the Yes Bank default is likely to increase funding and liquidity pressure on small
private sector lenders. In line with the sharp decline in economic activity there could be steep rise in unemployment
which will lead to a deterioration of household and corporate finances. In order to support the ailing economy the
central bank of India announced a slew of measures to infuse liquidity amounting to ₹3.7 lakh crores including;
reduction in Repo rate by 75bps to 4.4% (inducing to channel credit to productive sectors), reduction in CRR to 3%
(this alone would release ₹1.3 lakh crore liquidity), three-month moratorium for EMIs on all outstanding term loans as
on March 1st 2020 (this will not be treated as a credit event) and defer interest on working capital repayments by three
months (this will not result in downgrade). Though these measures are likely to provide some relief to the sector, the
banks, with higher exposure to stress sectors (real estate, small and mid-corporates and hospitality) and weak funding
profile may face tough times.

In the prevailing conditions, we expect funding and liquidity at large private sector banks to remain stable, given well-
established franchises and strong depositor bases. However, the default of Yes Bank will lead to risk aversion among
depositors and creditors, creating funding and liquidity challenges for smaller private sector banks with weaker
franchises.

At current levels the Bank Nifty is down 32.1% in last 1 month. The fears surrounding credit growth, asset quality and
weak macro environment led to sharp fall in banking stocks across the board. Small/mid-sized banks have witnessed
even steeper decline in prices following the YES bank crisis, as investors feared a flight of deposits to larger banks. We
believe this correction has rationalised the valuation for large cap banks and offer an attractive investment entry point.

 Auto: The industry has already been under duress during 9MFY20 with net sales of OEMS witnessing a decline of
~14% YoY vis-à-vis a 16% YoY growth witnessed during 9MFY19. The domestic industry sales volumes are down
nearly 16% for YTD FY20. The sector has endured tough times over the past six quarters due to a cyclical downturn
across segments; in addition the current lockdowns across factories due to COVID-19 has further impacted the sales in
the month of March and are likely to stay depressed in near term. The Wholesale volumes have been under pressure
across segments in March with ~50% fall in PVs, -50% in 2-wheelers and -90% in Commercial Vehicles, despite being
a festival season (Gudi Padwa/ Ugadi, Chaitra Navratri).

With respect to BS-VI transition, the Supreme Court has allowed registration of sold (but not registered) vehicles until
30th April 2020. Except Delhi NCR, up to 10% of the unsold vehicles have been permitted to be sold within 10 days
post lifting of lockdown. According to FADA estimates ~ 105k 2-wheelers, ~2,250 passenger cars and ~2000 CVs
across India have been sold but not registered. Unsold vehicles inventory stands at around 700k; 2 Wheelers, ~15k
Passenger cars and ~12k Commercial Vehicles. Given the impact of the lockdown on the economy, we expect
consumer sentiments to be depressed post the lockdown and believe that the 10 day extension would not lead to any
meaningful reduction in the unsold BS-IV inventory. Companies like Hero have announced that they would support
their dealers and come up with a plan to absorb their unsold inventory. Given the headwinds and turbulences,

We expect near-term volume performance to remain under pressure as the Covid-19 outbreak persists and see no
meaningful recovery in 1HFY21. The auto index has corrected ~31% over the last month. The correction was more
intense for companies with significant exposure to china and other international operations such as Motherson Sumi
(down 42% over the last month) and Tata Motors (-51.28% over the last one month).

We believe that companies with global linkages are relatively more susceptible, while domestic-focused companies are
relatively better positioned and likely to witness earlier revival.
 Consumer: Although there expected to be a marginal fall in general consumption and overall demand slowdown on
account of lockdown and subsequent pressures on the economy, the sharp decline in crude prices could benefit the
industry with reduction in packaging and transportation costs. So far the companies have seen limited impact on
account of supply chain disruptions because of inventory build-up. However, a prolonged disruption can have an
impact and associated cost increases. Though the demand is likely to slow down near term, there expected to be sharp
change in consumer preferences and purchasing behaviour benefiting trusted names in the FMCG categories. We
expect the personal hygiene category to see higher growth compared to other categories, as consumers become more
aware of their necessity during a health crisis, the companies with dominance in these categories will witness strong
revenue traction. Due to lockdown the average ticket size of purchases will increase as the frequency of visiting shops
will decrease this change if sustained post crisis will benefit organized formats -modern trade/e-commerce and large
players.
Though at present it’s difficult to quantify the impact of COVID-19/lockdowns for FMCG sector, it will certainly impact
supply chain management, working capital financing and product category preferences. The FMCG companies with a
strong brand recall and presence in product categories such as food & beverages and hygiene, coupled with strong
supply chain, will see increase in market share.
 Cement: The impact of COVID 19 on the cement sector is likely to be sharp in 4QFY20 and 1QFY21, however, the
normalcy is expected by the 2Q’FY21 (assuming the timely withdrawal of the lock down). The recovery in cement
demand is likely to be slow and gradual as the infrastructure segment will take time to return to normalcy being
impacted by the absence of labour and liquidity. In addition the delay in demand from individual house builder segment
and the organized housing segment is likely to be deferred.
Despite demand pressures all-India cement prices remained flat MoM at ₹323/bag in March 2020. The prices remained
flat in most of the regions; though Southern India witnessed a decline of 3% while weakness persisted in eastern region
too. The typical demand rush seen from the infrastructure and the housing sector was not seen in the month of March.
During the first half of March the construction activity was slow due to labour shortage owing to festive holiday of Holi
while the later part of the month was dominated by COVID 19, with the large states such as Maharashtra, Rajasthan,
Kerala and Delhi announcing the lockdown to prevent the disease spread. This was further aggravated with country
lockdown announced by the Government by India. The disruption in construction activity across the country has
impacted the sales volume of the cement companies across the board. The companies with weaker financials and lack
of balance sheet strength are likely to see elevated working capital requirements.
The production process once the lockdown is withdrawn will have a quicker turnaround, however logistic issues and
demand revival remains the key. The demand revival could be delayed following a) lower spending on infrastructure
and low cost housing segment as the government’s treasury addresses the aftermath of the issues related to the
COVID 19. B) Individual house builders demand recovery to be postponed till the normalcy of smooth flow of funds is
restored (currently under pressure). This is likely to be in 2HFY21. C) Prolonged pain in the organised construction
activity D) Recovery in the private and commercial sector delayed.
 IT: We believe that IT/ITES industry could face some headwinds led by the lockdown in near term due to delays in deal
signing and furloughs. The uncertain business environment may force many clients to push back on spending which
could imply slower conversion of orders into revenue. In a recent concall, Accenture revised its revenue growth
guidance to 3% - 6% in local currency terms for FY20 compared to earlier estimate of 6% - 8%. This signals pressure
for the Indian IT services industry in 4Q’FY20 and FY21, particularly in 1HFY21.
We believe that companies with more exposure to verticals such as travel & transportation, aerospace, manufacturing,
education and BFSI could face greater business impact in terms of deal closures and conversions. In addition given the
state of global economy, consulting revenues could see a larger hit than outsourcing revenues. In terms of margins, we
expect that lockdown cost, pricing pressure, lower utilization, unfavourable cross currency movement would act as
headwinds, while tailwind would be led by rupee depreciation, lower travel and utility cost.
  Metals and Mining: In the wake of COVID-19 lockdown, major steel players are scaling down/suspending operations
to align production to man-power availability and disruption caused in the supply chain. This production cut appears to
be the first since 2015 when high level of imports forced domestic steel producers to trim production. The lockdown has
stalled on-going expansion projects and are expected to curtail operations at high-cost upstream facilities in order to
optimise cost. This is expected to impact volume and margins for the industry, owing to adverse operating leverage
arising from production cuts, in 1QFY21. The demand situation remains weak across sectors in the near term on
account of coronavirus thereby pressuring domestic steel prices. Leveraged steel players are expected to find the
economic environment more challenging than others in the coming quarters. Globally the context is no different with the
lockdown pulling the commodity prices down across the sector with earnings of companies operating in this space
expected to fall sharply. Aluminium too is no exception with rising inventories in global exchanges and tumbling
demand due to the impact of the pandemic have resulted in aluminium prices to decline by 10% month on month in
March, 2020 to reach a four year low of $1,529. On one hand the demand for the next quarter appears weak with
automakers halting production across Europe and the US, while declining raw material costs are expected to
encourage production thereby generating surplus inventories. Going ahead the market anticipates the global
commodity prices to remain weak on account of the feeble demand.

Valuation & outlook

 The consensus Nifty EPS forecast for CY20E and CY21E stands at 563.9 (2.5% MoM) and 688.1 (-1.9% MoM)
respectively. NSE Nifty is currently trading at a 12 month forward P/E multiple of 16.9x (vs. 5 year average of 22.5x).
We remain positive on large cap banks, midcap cements, select auto ancillaries and neutral on consumer
staples & discretionary and IT.

TTM PE Chart Current month - Consensus Estimates - Consol

28.0 Nifty Nifty Midcap

26.0
24.0
Particulars CY20E CY21E Particulars CY20E CY21E
EPS ( INR ) 650.20 791.75 EPS (INR) 1017. 5 1215.30
22.0
20.0 13.52 11.10 11.72 9.82
P/E P/E
18.0
P/BV 1.86 1.67 P/BV 1.39 1.26
16.0
Mar-16

Nov-16
Mar-17

Nov-17
Mar-18

Nov-18
Mar-19

Nov-19

Mar-20
Jul-16

Jul-17

Jul-18

Jul-19

ROE % 14.30 15.46 ROE % 8.34 9.54

TTM PE Avg Max Min

Div Yield % 2.26 2.56 Div Yield % 2.05 2.34
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