Stocks of the pharma and FMCG sector have emerged as safe bets for investors in the current volatility as these are likely to be the worst-hit by the precautionary COVID-19 lockdown that threatens to slow down economic activity in India.
Investors are picking larger pharmaceutical companies such as Dr Reddy's Laboratories (DRL), Sun Pharma and Cipla, among others, whose valuations at multi-year lows and have been least impacted by the ongoing market turmoil. Considering data up to 3 April, Nifty Pharma Index has fallen a little less than 10 percent in a month's time while NSE's benchmark Nifty 50 has lost 28 percent in the same period.
Pharmaceutical products come under essential commodities, reducing chances of disruptions of its production or disruptions.
Rupee's weakening past the 76-mark also serves in their favour as it boosts prospects of exports for pharma companies in India, the leading exporter of generic drugs. Estimates indicate that India supplies up to 50 percent of the US' generic drug needs, the nation that is currently the epicentre of the pandemic. Pharma products also dominate the country's exports to African countries.
However, India's pharma companies are highly dependent on China for its APIs (Active Pharmaceutical Ingredient) that are essential for manufacturing drugs. A bulk of these come from areas around Hubei and Zhejiang provinces which being the most affected by COVID-19, are yet to be completely reopened or return to normal production capacities.
Large pharma companies are likely to be least affected by the shortage in supply of these raw materials due to sufficient inventory.
Fast moving consumer goods (FMCG) companies are expected to make gains amid the nationwide lockdown especially due to panic buying of daily use items by the public. Consumers are buying and stocking soaps, toothpaste, instant food, biscuits and other staples.
"Most consumers have made advance purchases for a month compared to usual advance purchase of 10 days out of 90 days of a quarter. We estimate this will boost FMCG revenues by a good 10% during the quarter as people would buy additional 10 days of essentials," said ICICI Securities.
Despite the limited movement of consumers during the lockdown, FMCG products, which are being sold under the essential goods category, are in high demand. Online buying and home delivery of these products have also considerably spiked since mid-March.
ICICI Securities recommends Tata Consumer Products, ITC and Dabur India among FMCG stocks.
Banking stocks suffer
On the other side of the spectrum are banking stocks that have been trading near their 52-week lows.
Amid the turmoil, banks and financial institutions have been hit hard for multiple reasons. Interest rates have plunged to all-time lows, cash withdrawals are free and a 3-month moratorium is being offered on EMI payments. Most banking operations have been halted during the lockdown to only serve customers with essential services like withdrawals and deposits of cash.
Most of their income-generating options from commercial operations are hurt and only adds on to the existing threat of heightened NPAs (non-performing assets) due to the shutdown of businesses across the nations. The reduction in profit generation capacities of their clients will not only raise bad debts of these financial institutions, but it will also reduce their own profits in the months to come.