It has been a year since the Infrastructure Leasing & Financial Services (IL&FS) crisis erupted but its effects are still being felt, especially in financial space. Underlying economic momentum has also decelerated sharply, with the Q1FY20 gross domestic product (GDP) growth at 5 percent and the Reserve Bank of India revising its FY20 GDP growth forecast to 6.1 percent from 6.9 percent.

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Even though the government and the RBI have been taking steps to revive growth, brokerage house Motilal Oswal believes the impact of these measures will be visible only with a lag.

The central bank has cut the repo rate by 135 bps since February 2019, while the government reduced the corporate tax rate last month in a bid to revive the flagging economy.

Also Read: Will tax cuts be enough to aid Q2 earnings? Here's what brokerages have to say

According to Motilal Oswal, the second-quarter earnings season will be more of the same — tepid and uneventful.

"Underlying demand slowdown in the domestic economy and weak global commodities prices are expected to take a toll on earnings with very few bright spots, if any. However, it is important to look at this quarter’s numbers from a profit before tax (PBT) perspective, as the reduction in the corporate tax rate cuts will result in several adjustments in this quarter’s tax numbers," the brokerage said in a report.

Markets have remained weak in Q2FY20, despite the sharp bounce back post-tax cut with Sensex down over 2.5 percent for the quarter.

Going ahead, earnings risks continue to be tilted to the downside on account of the underlying weak demand scenario in the domestic economy, the uneven asset quality trends in financials and the deflationary trends in commodity prices, Motilal Oswal said, adding that at this point, tax rate cuts will largely limit the downgrades rather than driving big upgrades on the earnings front.

With that in mind, the brokerage has constructed a model portfolio premised on the twin factors of earnings visibility, structural themes and tactical opportunities presented by valuation mismatches.

It maintains an 'overweight' stance on financials owing to expectations of asset quality normalisation over the next two years. Given the sharp underperformance of midcaps and relative valuation discounts, it has added more midcaps in its current model portfolio.

Top picks

Among large-caps, Motilal Oswal prefers ICICI Bank, SBI, HDFC, Bharti Airtel, L&T, Infosys, Maruti, HUL, Titan, and NTPC.

While, in the midcap space its top picks are Indian Hotels, Federal Bank, MMFS, Ashok Leyland, ABFRL, JK Cement, Oberoi Realty, Colgate, and Alkem Labs.

Sectors

Among sectors, Motilal Oswal stays 'overweight' on corporate banks and has increased weights in SBI, ICICI Bank and Axis Bank after their recent correction. While, in the NBFC space, it has raised weightage in HDFC, as the market share shift in both retail and corporate businesses will be towards well-established players in the current operating environment.

In the consumer space, it retained HUL, Marico, and Titan in the model portfolio and maintained weight in ITC given its attractive valuations and the significant EPS upgrade post the recent tax cuts.

In IT, the brokerage increased its weightage marginally in Infosys while maintaining weights in Tech Mahindra. IT offers a quality defensive bastion in volatile markets, it said.

In the oil and gas space, Motilal Oswal has raised weights in Reliance Industries and added IOC in the portfolio. IOC's quality of earnings will improve with the commissioning of the polypropylene plant at Paradeep and the ramp-up of the Ennore LNG terminal, the brokerage explained.

In the cement sector, it replaced ACC with Ultratech as it is moving down the cost curve and offers better operating leverage.

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