Vijay Kumar Gaba

In the context of India stock markets, I found the following two things worth noting on Tuesday:

(i)    A number of brokerages wrote strategy notes urging the clients to use the recent “lockdown fear” led correction in stock prices as a good opportunity to buy stocks. Apparently, the strategy appeared to be driven by (a) deep fall followed by a sharp recovery in 2020; and (b) belief that the abundant global and local liquidity and low interest artes will continue to support equity markets for couple of more years at least.

(ii)   The IT sector stocks corrected rather sharply after the bellwether TCS announced a decent set of number for 4QFY21 and encouraging commentary for FY22. This highlights, in my view, that markets expectations may be running rather high in terms of corporate performance and payouts. There is virtually no margin for any disappointment on earnings or payout front.

Some research reports have taken note of the intensifying second wave of Covid-19 infection cases, and cautioned against the likely adverse impact of the incremental restrictions on mobility due to this. For example-

“The Economic data released yesterday showed that the restrictions & sporadic lockdowns in response to the fresh wave of coronavirus infections started impacting the overall demand & growth. The IIP contracted 3.6% for February 2021, mainly on account of a steep contraction in the manufacturing output. Meanwhile, India's retail inflation rose to a 4 month high of 5.52% in Mar (5.03% in Feb & 5.91% in Mar 2020) as food prices soared.” (Aditya Birla Capital)

“The sporadic lockdowns/mobility curbs & night curfews put in place across key economic hubs in India in the past few days are likely to cost the nation $1.25 bn/wk. Taking into account rolling COVID curbs, if the current restrictions remain in place until the end of May, estimate is that the cumulative loss of activity could amount to around $10.5 bn, or ~0.34% of annual nominal GDP. However, the impact on the Q1FY22 nominal GDP is likely to be higher, shaving ~1.4% from the same.” (Barclays Bank)

The Nomura India Business Resumption Index (NIBRI) dropped sharply to 90.7 for the week ending 4 April from 94.6 the prior week, ~9.3pp below the pre-pandemic normal. This is its steepest weekly decline since mid-April last year. Accordingly, Nomura has cut the 2021 GDP forecast for India to 11.5% from the earlier 12.4%.” (Nomura Securities)

It is pertinent to note that currently, Nifty valuations (one year forward PER) are at 15% premium to the long term (10yr) average; and the market consensus is expecting ~32% earnings growth in FY22 followed by ~18% growth in FY23. Obviously, the expectations are running high, leaving little room for any disappointment.

Even after the recent episodes of sporadic mobility restrictions impacting the business and consumer sentiments, and downgrade of overall GDP growth for FY22, the consensus earnings estimates have been cut by less than 2% for FY22.

In my view, we may see further downgrades in both macroeconomic growth and earnings growth estimates for FY22. I am not sure if market may be forced to de-rate the equities’ valuation by these downgrades, but any rerating would certainly be difficult.

Currently, market consensus appears to be working with Nifty EPS of Rs640-650 for FY22 and Rs750-770 for FY23. I would prefer to be somewhat conservative and work with Rs590-610 for FY22 and 680-700 for FY23.

This means, I may be mostly ignoring the benchmark indices and focusing on businesses which I found (i) reasonably valued; and/or (ii) having very high visibility of growth, in spite of Covid-19 related obstructions. Because the Lord has commanded that “Blessed are the meek: for they shall inherit the earth” (Bible, Mathew 5:5)