Domestic as well as global equity markets witnessed heavy volatility in February as worsening geopolitical tensions between Russia and Ukraine kept the investors cautious. Furthermore, factors like inflation, aggressive rate hikes expectation, rising bond yields, and surging crude prices also weakened market sentiments.
The benchmark Sensex and Nifty fell 3 percent each in February, however, the decline in broader markets was sharper. BSE Midcap index and the BSE Small index corrected by 5.1 percent and 8.8 percent, respectively during the month.
In line with the broader markets, the majority of sectoral indices also gave negative returns in February 2022. BSE Realty, BSE Telecom and BSE Oil & Gas index tanked in excess of 7 percent. On the other hand, BSE Metal and BSE Consumer Durable index were the only 2 indices that posted positive returns for the month.
Meanwhile, BSE Auto shed around 7 percent and BSE Capital Goods lost over 5 percent. BSE Bankex, BSE IT, BSE Healthcare, and BSE FMCG were down in the range of 3-4.5 percent each.
The December quarter (Q3FY22) results showcased healthy YoY earnings growth, ahead of Street expectations, however, they also highlighted raw material-led margin pressure in sectors like automobiles, construction materials, consumer durables and consumer staples.
BSE Realty fell the most in Feb with all its constituents in the red. The demand has picked up as real estate prices are low and interest rates are very attractive. The sector is likely to see more traction in 2021 and hence Axis Securities upgraded its stance on Real Estate to an Equal Weight.
Telecom was another sector that witnessed over 7 percent fall in Feb. "Telecom has become the most critical sector during the current challenging times to keep the businesses up and running. The sector was seeing an improved pricing environment even before the COVID-19 outbreak. The industry is highly consolidated with two strong and one weak player in the wireless space. We recommend an Over Weight stance on the sector," Axis Securities notes in its report.
For the oil and gas sector, Axis believes that its bottom line is likely to remain stable on account of higher crude prices and the likelihood of high refining margins due to improved supply-demand balance. Upstream companies may surprise positively in the scenario of higher-than-expected crude prices, it added. In this view, it upgraded the sector from Underweight to Equal-Weight.
Auto was another lagging sector in Feb, however, going ahead a significant demand improvement may be seen but the current lockdowns are expected to have an unfavourable impact on the demand scenario. Moreover, the rising input costs are wreaking havoc in the Auto companies with leading companies such as Maruti reporting margin disappointments, notes Axis.
"The auto sector does expect demand revival and many companies offer decent upside from the current levels. However, the sector remains a mixed bag as of now, as lower-than-expected volume may result in weaker-than-expected margins. We downgrade the sector to Equal Weight from Over Weight," it noted.
Despite a 5 percent fall in the capital goods sector in Feb, Axis Securities believes that the private Capex cycle is expected to pick up soon, further supporting the Capital Goods sector. It upgraded its stance on the Capital Goods sector to Equal Weight from the Underweight stance before.
Banking, IT and pharma sector were all down in the range of 3-4.5 percent in Feb.
Despite Axis Bank and ICICI bank reporting a good set of numbers, the economic challenges cannot be wished away and the banks will have to bear the brunt of the prevailing challenges, noted Axis. The pick-up in credit demand as the economy gradually recovers remains to be seen. It downgraded the sector to Equal Weight and remain watchful on the developments in the sector.
For IT, the brokerage said that large IT companies continued their growth momentum in Q4FY21, led by strong deal closures and inline performance on the margins front. The sector is in a re-rating cycle and this trend is likely to persist over the medium term, it added. The IT space is marked by companies having strong balance sheets and playing on the prevailing digitization trend. Even at current levels, the IT sector valuations are reasonable. Thus, it recommends an Overweight stance on the sector.
For the pharma sector, the December quarter results were a mixed bag with a not-so-encouraging performance from the US businesses. While margins were strong, a large portion has already been factored into the market prices. For the domestic formulation companies, cost-saving measures were the biggest driver in their Q4FY21 performance.
"We believe moderate recovery is likely to continue in domestic Pharma revenues while significant improvement in operating metrics is needed for further re-rating. We foresee risks to this and continue with an Equal Weight stance on the sector," noted Axis.
However, the metal index surged over 9 percent in the month of February despite the overall weakness in market sentiment. As per the broekrage, the Metals & Mining sector has seen a significant pricing uptrend with an improvement in the global scenario. This trend is likely to persist in the medium term and Metal stocks are likely to perform well, it added. It upgraded its stance on the sector to Overweight.