Bluest of blue chips down in the dumps; should you buy or avoid?

Dalal Street’s mega caps are now down in the dumps as the ongoing panic selling due to coronavirus pandemic has spared none. While traders are having a field day amid the market’s zigzag trade, analysts and investors are at a loss trying to figure out where the bottom for these stocks lies.

Domestic equity indices have since slipped into the oversold zone, making valuations look attractive.

Some market veterans are advising investors to accumulate mega-caps considering the substantial drop in the domestic equity market.


In the ongoing selloff, Nifty stocks have fallen sharply from their 52-week highs. YES Bank has declined the most at 91 per cent from its yearly high, as company-specific issues have doubled down on market jitters to drag the stock of the private lender.

Among other worst-hit blue chip stocks are Oil & Natural Gas Corporation (down 63 per cent), Tata Motors (down 62 per cent) and Zee Entertainment (down 61 per cent). Other components of the Nifty50 index are down 6-58 per cent.

Even the bluest of blue chips – Reliance Industries and Tata Consultancy Services – are down over 20 per cent each.

Nifty is now down over 20 per cent from its 52-week high of 12,430, which it had scaled on January 20.

“This is a good time for long-term investors holding cash to keep buying on every dip. Mega caps (i.e. Nifty heavyweights) look more appealing right now, compared with other largecaps and midcaps,” Kotak Securities said.

Amit Gupta, co-founder and CEO, TradingBells, however, advised investors to stay away from the market for a while till volatility settles. “We can see some notable reversals,” he said.

Valuations have now turned favourable for largecaps after the correction. Based on Bloomberg consensus estimates, the Nifty50 forward PE now stands at 14.7 times compared with 13.8 times for Nifty Midcap Index. The o-year forward PE of Nifty-50 has now gone below its 10-year average of 15.6 times. The previous bottom of Nifty50 forward PE was 14.2 times in February 2016.

Volatility index India VIX has seen a solid spike, and hovered at its highest level since 2009. The sharp rise in VIX resembled its post-Lehman collapse behaviour.

The rise in VIX as seen on the chart has been vertical and, hence, it cannot sustain for long time. A sharp drop in VIX will have an inverse correlation with the equity market. India VIX was up over 10 per cent at 56.92 at around 10.40 am on Monday.

After the post-Lehman crisis, Nifty last week broke the 200-weighted moving average at 10,300 for the first time in 15 years.

“For a decisive break and for Nifty fall to quality as a structural bear phase, the index needs to sustain below this mark for a few more weeks. Since the fall has been very sharp and within very short time, it has the potential to pull back immediately. As global markets will remain volatile with the spread of the Covid-19, one needs to keep a watch on the 200 WMA,” Kotak said.

For those looking to accumulate stocks in this market downturn, Motilal Oswal Financial Services has recommended Eicher Motors, HDFC and HUL with a price targets of Rs 24,000, Rs 2,875 and Rs 2,490, respectively.

IIFL and Sharekhan recommend have ICICI Bank (target price: Rs 640) and Reliance Industries (Rs 1,710).