Vijay Kumar Gaba

The 1QFY21 results announced so far have been mostly better than average estimate of various analysts. About two third of the companies in Nifty 50 universe have declared their results so far. Out of these about 10% companies have missed the analysts on EBIDTA front; while 60% have surpassed the estimated with decent margins. This has obviously comforted the investors. Nifty sales has declined 28% (yoy) while EBIDTA decline is marginal at 1%. This highlights that most companies have managed their cost very well. The empirical evidence suggests that cost savings are mostly sticky with most of the Indian companies. This certainly augurs well for the future profitability of companies.

The good news however ends here. On macroeconomic side, the incremental data is indicating that the economic recovery might be stalling after small recovery in May and June. Many economists and strategists have underlined this phenomenon in their recent reports. For example, note the following:

"Phase 2 of unlocking India commenced from July 1, which offered more relaxations and left it to State governments to decide the extent of unlocking. Our data shows July did not witness much incremental improvement and the pace of recovery has hit a plateau. Our Activity Index shows that in July the economy operated at 79.6% of capacity, which existed in February (pre-COVID). One reason apart from the Monsoon and intermittent lockdowns that could be moderating the pace of normalization could be the resurgence of cases in rural India. (emphasis supplied)" - Elara Capital

"Our in-house Economic Activity Index (EAI) for India’s real GVA (called EAI-GVA) contracted 7.0% YoY in Jun’20 – its fourth successive decline – which implies that economic activity shrank 18.7% YoY in 1QFY21. Industrial activities contracted sharply by a fifth (compared to 33% fall in May’20), while the services sector shrank only 3.6% YoY (supported by massive fiscal spending) in Jun’20. Farm activities grew 10.4% YoY – the highest pace in nine years.  EAI-GDP index (our in-house measure of official GDP) also contracted 4.8% YoY in Jun'20, following 19.7% decline an month ago and implying a decline of 18.4% YoY in 1QFY21. Very strong fiscal spending growth of 49% YoY supported EAI-GDP, without which the decline was 7.5% in Jun’20. Private consumption spending contracted 9% YoY and investments declined 30% YoY in Jun’20. Excluding government spending, EAI-GDP contracted 20% YoY in 1QFY21.  Overall, our estimates suggest that real GDP may have contracted 18-20% YoY in 1QFY21, in line with our forecasts. We expect another decline of 2-3% YoY in 2QFY21, before real GDP posts growth in 3QFY21." - Motilal Oswal Securities