Vinod Nair
Global markets have done well in the past week understanding the fact that the world is not under a serious second wave attack from virus. At the same time, Indian markets were very volatile with a mixed bias due to FII selling & border issues.
A mild improvement was seen by the end of the week, trying to catch-up with the world equity after positive Supreme Court (SC) ruling for telecom sector on AGR that helped banks, and minor de-escalation in Indo-China bilateral issue.
The launch of privatisation of coal mining is a very big reform in India's mining sector. It is expected to be very positive for power, metal, fertiliser industries and add sufficiency in country's energy resources.
To make it successful the implementation, financial and operational system has to be very effective and feasible for all. For Coal India, it is unlikely to have benefit or losses in the short-term.
But it will gain in the long-term, in-terms of savings from the huge responsibility it is bearing as the largest source & producer in India (more than 80 percent of total production).
It will get ease from planning, production & capital expenditure while bearing high competition, cope up with technology & quality of product impacting its performance in the long term.
The SC regulatory relaxation for telecom is positive in the short to medium term giving time to plan its cash flow. The outlook for long term is positive with visibility over revenue growth and demand increasing ARPUs and consolidate the sector.
COVID-19 has brought boom to the telecom sector. Work from home and social distancing have paved way for remote working, video conferencing and telecommunication technology as a key growth driver for the sector.
Overhang of AGR dues might force telecoms to bring tariff hikes and funds, which could be inevitable in FY21 & FY22. We have a constructive view in the long term due to trio monopoly and better outlook in demand while cautious in the short to medium–term due to valuations being on the higher side, concerns over capital expenditure, pressure on cash-flow and heavy debt.
In the last few years, Indian chemical sector is benefitted hugely from high sourcing from India by shifting from China due to pollution regulatory restrictions, cost optimisation and diversification.
In India manufacturing of chemical is of good standard, quality, compliance, process and R&D. Domestic industry was attractive for sourcing of raw material and intermediates for global giants. Chinese are still the largest suppliers in the world including some key raw material & intermediaries for API, pharma and speciality chemical.
Moreover, post COVID-19, the speed of diversification & enquiries has accelerated. The domestic industry's acceptance has matured in terms of technology, skills and players are investing in R&D for new products. Some global players are investing in some companies and for long term contracts.
Reduction of oil prices & related chemicals is helping the industry through a decrease in cost of production and expansion in margin.
COVID-19 has forced a complete makeover of IT business model in India. Work from home has become a new norm and major companies in India are planning to make 75 percent of its workforce working remotely by 2025.
These shift in models could bring savings for IT companies going ahead as there will be reduction in travel, admin and real estate cost. IT spending is estimated to decline by 8 percent in 2020 versus 5.8 percent growth forecasted earlier by Gartner as focus is turning to cost reduction.
A broad-based recovery is expected in the later half of FY21 powered by spending in healthcare, insurance and education segments. Given its prospects & stability in business we remain positive for the sector in the long term.
Segments like telecom, chemical, IT, FMCG and pharma are likely to do well and safer to invest. Given the weak economic outlook for the coming quarters only stable & attractive valuation stocks and sector will do well.
Largecaps are better placed to overcome this situation with strong balance sheet and operational strength to grow & maintain business risk & growth. Indian market has done well in the bear rally which can consolidate in the short-term.
The author is Head of Research at Geojit Financial Services.
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