It's time to play micro themes, says ICICI Securities; values Nifty at 14,400

The stock market has fared decently in a year that has been disastrous for several businesses and economies owing to the COVID-19 pandemic.

After testing multi-year low levels in March, the benchmark indices Sensex and Nifty have witnessed a heroic recovery and turned positive for the year. The Nifty has recovered 84 percent from the lows and has given a 15 percent return for CY20.

Analysts believe that as we embark towards 2021, the resilient domestic setup points towards a recovery in key macroeconomic data - GDP, infrastructure spending - post a weak year. Corporate earnings after the dip are likely to stage a handsome growth trajectory.

However, after a “V-shaped” recovery and a flush of liquidity in the capital markets in CY20, the economic recovery path ahead is likely to be uneven. Furthermore, rising commodity price-led inflation and new strain led risk of restrictions and lockdowns also persist, according to ICICI Securities.

“CY21, therefore, presents an opportunity where the basic tenet of asset allocation and sectoral/security selection will be tested and identification of micro themes across segments will hold the key,” the brokerage house said in a report.

After a strong “macro-based” recovery, the brokerage is of the view that it is time to play some “micro themes”. Here are the key micro themes for CY21:

PLI scheme boost for textile/electronics/specialty steel and benefits of import substitution

Food processing to utilise excess farm output for value addition

CRAMS – Significant capex hints at growing visible opportunities

Cloud-based opportunities in the IT sector

Expected cyclical upswing of CV segment

Insurance on the cusp of sustained structural growth

Product-based capital goods companies to benefit from capex upcycle

Roads and Highways – Resilient segment within the infrastructure

"Meanwhile, in CY20, India has been a preferred destination for FIIs, with FII inflows at life-time high, further supporting our view of improving market sentiment," it said.

ICICI Securities pegs Nifty’s fair value at 14,400. "With the worst of asset quality concerns behind us amid resolution of big-ticket stressed assets and economic optimism in the post-Covid era, Nifty earnings CAGR is impressively placed at 22.7% in FY21E-23E," said the brokerage.

For CY21, it expects midcaps and smallcaps to gain relatively more than the large caps.

“Our thesis is based on the fact that delta in earnings growth during a recovery phase will be high in midcaps and small caps vis-à-vis large caps whereas multiple expansion in the former will provide additional alpha for capital appreciation,” it said.

Other macro factors like benign interest rates and structural cost rationalisation measures will also aid operating and financial leverage for this category.

Here are ICICI Securities’ top picks for CY21 in the midcap and small-cap space.