These contra bets can deliver amidst risk

If you are reading this piece, the odds are rather short that stocks feature in your investment consideration set. But do you have the stomach to buy into that end of the equities spectrum most bloodied, battered and bruised by the unprecedented shutdown?

If you answer in the affirmative, you could look into companies that thrive on discretionary expenditure — leisure, accommodation, travel, film exhibition, or airlines.

So, leaders in these sectors, such as InterGlobe Aviation, PVR, Inox Leisure, Indian Hotels, Mahindra Holidays, IRCTC and Delta Corp, could be good contra bets for high-risk investors. These companies will possibly garner more market share once these businesses are opened up, and people start travelling, go to theatres, or take vacations as they did before March.

“The liquidity pressure may compel some single-screen or smaller multiplex chains, tourism companies, restaurants or even airlines to down shutters, ushering in a new wave of consolidation,” said Devang Mehta, head – equity advisory, Centrum Broking. “Some of the companies, which are market leaders in their respective sectors, will possibly garner more share but prospective investors in these sectors should stick to the best quality names and leaders.”

Most market leaders in these sectors have recovered on an average 40% from the lows of March 24, but are still down 40% from their 52-week highs.

Since Russia had approved the world’s first Covid-19 vaccine on August 11, shares of InterGlobe Aviation, Wonderla Holidays, Indian Hotels, PVR, Inox Leisure and EIH rallied between 20% and 30%.

“Investor confidence has significantly improved after Covid vaccine announcement by Russia and subsequent reduction in overall volatility in the market, leading investors to participate in these beaten down sectors as contra bets,” said Neeraj Chadawar, head — quantitative equity research, Axis Securities.

As most consumer centric businesses will have liquidity pressures, debt servicing, negotiation of rentals and compulsive reduction of capacities should help in stock selection.

According to Abhimanyu Sofat, head of research, IIFL Securities, IndiGo in the aviation sector has the ability to withstand the pandemic and will find it much easier to recover because of its strong balance sheet. From a retail perspective, Trent is a good pick in terms of Covid-19 recovery, he added.

Among the multiplexes, HSBC’s India equity strategist Amit Sachdeva is quite confident that PVR and Inox are well-equipped to manage this disruption, given the strength of their balance sheets and operating performance.
Analysts expect structural shifts in eating-out habits after the pandemic.

“While the eating-out industry is expected to shrink a bit, conversion from unbranded (street vendors) to branded will help drive growth for Westlife Development,” said Vicky Punjabi, analyst, JM Financials. “We maintain our positive stance and expect the business to emerge stronger out of the pandemic, given the management’s success in creating additional value drivers that are likely to sustain in the days ahead.”