Seven investment themes to look for in Samvat 2077

If you look at the themes that played out since March 2020, you get a broad idea of what themes you should be playing in the coming year. Here are 7 such ideas for you.

November 13, 2020 10:02 IST | India Infoline News Service
It is tough to look back at Samvat 2076 without discussing about the tumult, the disruption of normal life and the growth shock created by the COVID pandemic. But it also gives hope that the worst of the pandemic is over and Samvat 2077 should be smoother and palatable.

That brings us to the million dollar question; what should be the themes to play in Samvat 2077. If you look at the themes that played out since March 2020, you get a broad idea of what themes you should be playing in the coming year. Here are 7 such ideas for you.

Play the macro recovery in multiple ways

According to estimates put out by World Bank and IMF, Indian GDP is expected to contract by 9-11% in fiscal year 2020-21. That also sets a much lower base for growth as economic activity returns to normal. For Samvat 2077 investors can focus on banking asa generic consumption theme. At an industrial level, the order books of capital goods companies would fill up and the demand for metals should pick up. These are attractive ways to play the macro bounce in GDP.

Look for solid vaccine support ideas

This is a niche but interesting theme that is building up. India may not have the wherewithal to develop a vaccine from scratch but Indian pharma is best poised to offer scale and quality to manufacture vaccines. Not surprisingly, global pharma majors are queuing up to sign up Indian companies as partners to fructify their vaccine plans. Then there are adjunct stories like refrigeration and cold storage companies that will be required to store these vaccines at extremely low temperature levels. The list is lengthy but the vaccine story could dominate Samvat 2077.

Companies focused on the Atma Nirbhar narrative

How can you forget these companies? Which are the electronic companies in India that can outsource for global manufacturers like Apple, Samsung and Sony? Defence could be another big outsourcing story as scores of PSU companies with surplus capacity get an opportunity to profitably put that capacity to use. That could be focused on PSUs and could be an interesting story considering current valuations.

Hygiene matters and so does risk reduction

These are two sets of ideas that couldplay out in Samvat 2077. Both are, in a way, an outcome of COVID and the phobia that it has created in the minds of people in general. If you look at the Sep-20 quarter results, even within the FMCG story, it is hygiene products that have seen maximum traction. You cannot forget about insurance. The pandemic has woken people to the imminent risks that can be covered effectively by life and health insurance. These products are already seeing a spurt in demand and that could well translate into a veritable investment story.

China story – APIs and Specialty chemicals

We call it the China story because that is the genesis. The disruptions in the supply chain in China and local environment concerns forced global players to look at India as an alternative for active pharma ingredients or APIs and also specialty chemicals. India already has an established franchise in APIs and specialty chemicals and these have done extremely well last year. The good news is that the story may have just about begun and could progress much further.

Debt reduction and monetization

The uncertainty and panic created by COVID has highlighted the business risks of excess debt. Stories like RIL and Tata Motors reducing debt is well documented. If you look at the latest quarter results, there are scores of mid cap and large cap companies that have lightened debt in their balance sheets, thus reducing financial risk exposure.

Here is a simple test! Look for companies that are showing consistent fall in debt/equity ratio and improvement in debt service coverage and interest service coverage. They could be your debt reduction candidates. Also look out for stories of companies that are monetizing idle assets to repay debt.

Companies that actually curtailed costs

This is an interesting narrative. Most companies benefited from lower crude costs and lower price of raw materials in general. But you need to go beyond that. The real challenge is to see which companies are actually reducing their production and operating costs. There are two critical data points to check.

Firstly, look for companies showing an improvement in net cash generated from operations. That is done by tweaking the way you deploy working capital and can be a clear sign of building efficiency. The second is to look at companies with consistent improvement in operating margins.

Like always, there are no clear answers on what to buy. But, COVID has created a very sharp narrative focused on the need for conservatism and risk management. If you find stocks fitting the definition, take out your shopping baskets for Samvat 2077.

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