Outlook Money brings you expert opinions on how markets are predicted to behave over the next year. This is the third, in a series.
In this part, we present views of Vinay Khattar, Head of Research, Edelweiss Wealth Management.
How do you see the year 2021 performing for markets?
The year 2021 will see a bounce back from abnormal bases that were set in 2020. While the headline data will be buoyant, stock picking will be very tricky. The valuations are stretched and will continue to be high owing to massive Quantitative Easings (QEs) and low-interest rates. One needs to remember that while the monetary easing will continue into 2021, the pace of expansion is likely to slow. We would advise adding to companies with earning visibility as and when valuations get favourable.
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Q: Which sector will be in demand and why?
The Indian manufacturing has bounced back strongly, with Q2 GDP clocking 60 bps growth. PMI manufacturing has also remained in an expansion zone for five consecutive months now. IIP has also surprised on the upside at 3.6 per cent (vs consensus: 1.1 per cent). Of the 23 manufacturing industries, 14 showed an expansion in October, aided by strong growth in Pharmaceuticals (12.9 per cent Y-o-Y), Chemicals (9.6 per cent Y-o-Y), Electrical Equipment (20 per cent Y-o-Y) and Other Transport Equipment (27 per cent Y-o-Y). Overall manufacturing has moved into the growth trajectory. Mobile phone exports at $3 billion are healthy and have a huge untapped potential in value-added exports.
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We believe with production-linked incentive (PLI) scheme in place, coupled with tax reliefs on new manufacturing units and labour code reforms, India could potentially have a huge Foreign Direct Investment (FDI) come into the manufacturing sector. We believe contract manufacturers, textiles, speciality chemicals, pharma and API companies would be a favourable play then. When the manufacturing sector picks up, many allied sectors also do well along with it. We continue to stay positive on automobiles, large private banks, cement, speciality chemicals, IT and metals.
Q: Which two stocks will benefit from this sector and why?
Our top picks are Navin Flourine Industries Ltd (NFIL) and Ashok Leyland. We find Navin Fluorine’s commentary on the product pipeline very encouraging with the new capex unleashing further growth in the Speciality Chemicals segment. Additionally, we see robust growth coming in from other segments like CRAMS (from the recently commissioned cGMP3 facility) and Refrigerant gases (where management indicated possible capex in the future). NFIL has already demonstrated its technical capabilities in the niche fluorination industry and we believe the company is a compounding story in this segment.
In the case of Ashok Leyland, we expect the commercial vehicle industry's monthly run rate to improve to more than 50,000. Also, it should start showing growth in FY22/FY23 backed by improvement in economy and commodity prices and profitability of the truck owner. With channel inventory, not even 20 per cent compared to the same period last fiscal, we expect OEMs will scale up the inventory levels in H2FY21 as economic activity gradually sees some recovery signs. This will consequently result in much better H2FY21 compared to H1FY21 as far as wholesale numbers are concerned. The next two years should be a recovery phase for the commercial vehicle cycle.
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