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Fuel prices are hovering at their record highs. The recent hike in prices took petrol price to Rs 87.85 per litre in Delhi and Rs 94.36 per litre in Mumbai. Likewise, diesel hit a high of Rs 78.03 in Delhi and Rs 84.94 in Mumbai.

In an interview with Money9, Siddharth Sedani, Vice President, Equity Advisory, Anand Rathi Shares and Stock Brokers, shares his views on how rising fuel prices can impact the Indian equity market.

Edited excerpts:

Q: Do rising fuel prices pose a risk to the equity markets?

Sedani: There can be a risk if it escalates further and disturbs inputs cost for the concerned sectors.

Q: In which sectors do you see froth after the recent run-up?

Sedani: While Indian equity overall is set for a new and enduring bull run, there are certain sectors of the market which have froth, if not a bubble. We suggest that investors take a stock-specific approach and book gains in some of the high-growth companies which have performed above and beyond their fundamentals. If you get the winners right and the company actually delivers growth, valuations will take care of themselves despite being expensive. Cyclical sectors can see bouts of profit bookings.

Q: What is the next big theme which can give big gainers? Can you suggest a few stocks from that sector?

Sedani: The key theme that we are looking at is essentially deep cyclical recovery and we are positive on specific banks where we see good valuation support. We are positive on infrastructure and construction space and that is one theme that should start playing out. Also, we remain constructive on IT and the pharmaceuticals, where there are structural growth stories from a medium-term perspective. In the backdrop of the current liquidity environment, we would see valuation multiples in these sectors go higher from the current level. We are positive on stocks like HCL Technologies (Target price: Rs 1,125) and Divi’s Lab (Target: Rs 4,095).

Q: Which factors are driving cement stocks? Do you think the momentum will sustain?

Sedani: Cement demand continues to accelerate led by robust retail demand and rising non-trade sales. Also, greater allocation to various schemes for affordable housing, rural development and infrastructure spending would be positive for the sector. The higher rural infra development capex and steps toward enhancing farmers’ incomes would aid in generating higher rural demand. Steps such as the extension of the time limit for interest and the tax holiday for affordable housing, more projects in NIP (National Infrastructure Pipeline), increasing road/highway/metro-rail development are positives. We expect all cement and building-material companies to benefit from the various schemes.

Q: Midcap and smallcaps have started rewarding investors after a long time. How you pick stocks in the broader market.

Sedani: The bulk of the FII money is flowing into large-cap blue chips, particularly financials. But now the small and midcap space could remain in favour in 2021 given their higher growth rates compared with larger peers. The current disruption has forced companies, especially midcaps, to rework their business models right from sourcing to manufacturing to distribution. Many smaller companies have adapted and embarked on prudent cost-cutting and reduced debt to clean up balance sheets. All in all, selective midcaps and small-caps may outperform large-caps in 2021.