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Second Covid-19 wave leads correction

Vaccinations accelerate; Correction an opportunity to add cyclicals

 * Resurgence in second wave of Covid-19 has led to elevated market volatility and correction. Nifty and Bank Nifty are down 5% and 15%, from the recent highs, resp.

* To contain the pandemic, several states have announced localized restrictions with Maharashtra yesterday unveiling set of broad-based measures for two weeks minilockdown. We expect the set of restrictive measures to impact near-term economic recovery till cases stabilize. However, key government authorities and policymakers have ruled out national lockdown.

* Meanwhile, vaccinations are gradually beginning to accelerate. As vaccination pick up further with approvals for more vaccines now in place, we expect the focus to shift back to growth, cyclical recovery and fundamentals.

* Thus, we recommend the correction as a buying opportunity and advocate adding a balanced mix of growth, cyclicals and defensive names. We continue to be OW on the BFSI, IT, Metals, Cement & Capital Goods, Neutral on Consumer, Auto & Pharma while staying UW on Energy, Utility and Infrastructure.

Positivity rate above 11%; Fatality rate below 1%; Fast tracking vaccines

* India is going through a resurgent second wave of Covid-19 pandemic as the daily new confirmed cases has shot up from 10K-11K in first half of February to ~2 lakhs in April’21. Active cases have already crossed the previous peak of ~1mn and are now inching towards ~1.5mn. Consequently, many states have imposed localized lockdowns and restrictions while Maharashtra has announced a 14 day lockdown with conditions to break the chain of transmission.

* Case positivity rate in India is now above 11%, much higher than 1-2% at the beginning of March. The pace of spread in 2nd wave is much more intense and daily new Covid-19 cases are already 2x of the peak seen during the first wave. The cases have now spread beyond Maharashtra into other states like Chhattisgarh, Uttar Pradesh, Karnataka, Delhi etc. Maharashtra still accounts for 42% of active Covid-19 cases while Karnataka, UP, Chhattisgarh account for 6- 8% of total active cases each.

* To contain the spread of cases, the government has fast tracked approval of vaccines on Emergency Use Authorization basis. It has recently approved Sputnik V vaccine. Also, it has announced that vaccines approved by drug regulators in the US, UK, European Union and Japan or those that have been cleared by the WHO will be eligible for use in India without having to conduct a local bridging trial.

Vaccination pace picks up; More than 12m fully vaccinated

* Pace of vaccination has started picking up in April’21 as eligibility criterion was extended to those with age >45 years. Vaccination pace has increased from 1M per day in the beginning of Mar’21 to 3.8M per day in Apr’21. With the approval of new vaccines, there could be further increase in the supply of doses which can boost the vaccination rate further, in our view.

* 111 Million beneficiaries have been vaccinated as of 15th April – 97.3 mn have received first dose while 13.9 mn have received both doses.

* Rajasthan, Maharashtra, Uttar Pradesh, Gujarat and West Bengal continue to lead the vaccinations in India. They account for 45% of the total vaccines administered in India, so far.

Deceleration in economic activity; Volatility offers entry opportunity

* Restrictions in various states and localized lockdowns will impact the economic activity in the near term and hurt the incipient gradual economy recovery from the depths of nation-wide lockdown in 1H FY21. The data on IIP and some other macro indicators as well as the commentary some sectors already points towards sequential deceleration in activity. Naturally, this has created some anxiety and introduced uncertainty about macro and micro forecasts. Equity markets have also reacted and corrected 6% from its all-time highs with concurrent increase in volatility.

* However, the restrictions are localized so far and both the Prime Minister and Finance Minister have mentioned that country-wide lockdown is not an option. This will provide more comfort and stability to the markets, in our view. RBI has also on multiple occasions communicated its stance of giving primacy to growth. We expect RBI to continue with its accommodative policy and prioritize growth.

* Also, with availability of more vaccines and as the pace of vaccination picks-up, we expect the narrative to gradually shift from Covid-19 and restrictions back to growth/cyclical recovery and rebound corporate earnings.

* While the index has corrected a modest 6% from its recent highs, many stocks have undergone a chunky 15-20% decline. 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. Thus, we advocate adding a mix of cyclical, growth and defensive stocks. In our recent Strategy note (link), we had maintained our OW stance on BFSI, IT, Metals, Cement and Neutral positions in Consumer, Auto, and Pharma while staying UW in Energy, Utilities and Infrastructure. Valuations at 20x FY22 Nifty EPS, while not mouth-watering, are not exorbitantly expensive either given the benign equity-bond yields metric and turn in earnings cycle after a decade-long tepid earnings delivery.

* Top Ideas – Large-Caps: ICICI, SBI, UIltratech, M&M, Hindalco, Titan, SBI Cards, Hindustan Unilever, Divis, Infosys, HCL Tech. 

* Top Ideas - Mid-caps: Chola, SAIL, Emami, Gland Pharma, LTTS, IEX, Varun Beverages, Gujarat Gas, Orient Electric, Federal Bank

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