In past few days the weather in India has changed rather swiftly. The winter has set in couple of weeks of early. The higher mountains are already covered with snow. North of Vindhyachal, the air has distinct chill; in South the weather is pleasant. The atmosphere is generally hazy, with heavy cool air not letting the pollution fly away.
In political troposphere also, the heat has
subsided with conclusion of intensely contested elections for Bihar assembly.
However, the political stratosphere continues to remain hot and dusty, as the
political leaders move further east towards West Bengal with their retinue.
In financial markets also the season has
changed. Past couple of months has not seen any noticeable disaster in
corporate debt sphere. Hopes of recovery have been rekindled with many
beleaguered borrowers (DHFL, IL&FS, Jet etc.) showing some encouraging
signs. The suspended debt schemes of Franklin Templeton have also given hopes
to investors that a significant part of their money may be returned in next
6months.
In stock markets, the quarterly result season
has just ended. The market participants were keenly watching the financial
results of companies for the July-September quarter, as it was the first
quarter after the state of total lockdown imposed in March ended and the
economy began to open up. The corporates have mostly surprised the market
participants positively. The results and commentary for the forthcoming quarters
have been mostly encouraging. The markets have not only warmed upto the idea of
normalization in growth in 2021, buy heated up significantly, rising to new
highs.
I find the following views and opinions of
various brokerages noteworthy:
GDP in 2QFY21 to decline, farm sector to do
well
There is near unanimity amongst analysts and
economists that the GDP data for 2QFY21, to be released this Friday, will show
a negative YoY growth; though there is no consensus on the extent of GDP
contraction. The estimates vary widely between 5% and 11%. It is also a
consensus that farm sector has done remarkably well in 2QFY21.
I find the following views of Nirmal Bang
Institutional Equity Research nearest to my own estimate:
GDP in 2QFY21 is likely to decline by 8.2% YoY.
Agriculture & Allied sector is likely to do well with a growth of 4% YoY in
2QFY21. Industry (excluding Construction sector) is likely to witness a decline
of 4.6% YoY. The Services sector (including Construction sector) will likely
decline by 11.2% YoY in 2QFY21 with the sharpest contraction of 25% YoY in
Trade, hotels, transport and communication sector. We expect a sharp
improvement in the Construction sector, which will decline by 6.5% YoY in
2QFY21 after declining by 50.3% YoY in 1QFY21.
We continue to factor in a protracted economic
recovery. For FY22, on a low base, we are working with a GDP growth of 6%. In
our view, containment measures may well get extended into 1HCY21, making us
maintain our cautious view on growth.
On top of a bumper Kharif (monsoon) crop that
has likely aided the 2QFY21 GDP growth, the latest sowing data indicates that
Rabi (winter) crop is also likely to be doing well. As per Prabhudar Liladhar
research Fertilizer and farm chemical growth data for Rabi crop is quite encouraging.
There is 18% growth in total sales in October driven by 34%/8% growth in
Urea/NPK. SSP placements up 21% YoY. Sale of domestically manufactured
fertilisers are up 13% while that of imported fertilisers are up 34% YoY,
driven by Urea.
IIFL securities recently wrote, “…the sudden
recent rally in crop commodities could prove a significant tailwind for CY21.
In the broader specialty chemical industry, Indian companies reported mixed
results, but still far better than their leading global counterparts, who
remained under serious pressure.”
2QFY21 earnings, broadly buoyant
As per Motilal Oswal Securities - The
Sep-quarter (2QFY21) corporate earnings season was a blockbuster one, with big
beats and upgrades across our Coverage Universe. With an upgrade (>5%) to
downgrade ratio (<-5%) of 4:1, this has by far been the best earnings season
in many years. 63%. Nifty sales declined 6.7% YoY (est. -5.2%), while
EBITDA/PBT/PAT reported growth of 8%/14%/17% YoY (est. -0.3%/-7%/-5%). 62% of
Nifty-50 companies reported a beat on our PAT estimates, and only 18% posted
results below our expectations.
HDFC Securities, also confirmed this view. A
recent note by the brokerage stated - Q2FY21 was a strong quarter. Key
highlights of the quarter: (1) Q2 margins beat estimates across multiple
sectors due to sharp cost-cutting initiatives and improved pricing power in the
wake of lower competition; (2) positive management commentaries on Sep/Oct exit
run-rate of revenues as unlocking led to sharp demand rebound in multiple sectors;
(3) market share gains for the larger companies; (4) much improved collection
trends for lenders; (5) continued uptick in capital markets activity, leading
to strong performance for brokers and exchanges.
Consensus turning bullish on markets
As the benchmark indices regain the entire loss
from January – March 2020 and trade at their all time high levels, the
brokerages seem to be turning bullish on Indian equities.
Morgan Stanley write in a recent note:
“COVID-19
infections appear to have peaked, high-frequency
growth indicators are coming in strong, government policy action is beating
expectations, and Indian companies are picking up activity through the
pandemic. Thus, we expect growth to surprise on the upside, rates trough to be
behind, and real rates to remain in negative territory for several months. We
lift our F2021,F2022, and F2023 EPS estimates for the BSE Sensex 15%, 10%,and
9%, respectively – we are now between 6% and 7% above consensus estimates. By
our estimates, the market will be trading at 16x forward earnings at our new
BSE Sensex target of 50,000 in December 2021 (our old index target was 37,300
for June 2021).
Sector wise outlook
Motilal Oswal Securities published a compendium
of management commentary post 2QFY21 results. The key highlights of the
commentary are as follows:
Banking: Commentaries
of banks suggest there was an improvement in growth and asset quality. The
asset quality outlook is much better than initially feared as collection
efficiency picked up sharply in 2QFY21. Collection efficiency in the Top 4
private banks was above 95% and for SBI it was 97%, excluding the Agri segment.
Consumer: Rural
demand continues to outperform urban demand. Some of the cost-saving measures
implemented by companies during the lockdown are likely to sustain going
forward.
Auto: A
preference for personal mobility, pent-up demand, and normalization of the
supply chain have led to demand recovery. However, most companies mentioned
being cautious due to uncertainty regarding demand sustainability post the
festive season.
IT: management
commentaries indicated the pandemic has acted as a tailwind for the sector - as
enterprises are undertaking cloud adoption at a faster pace and digital
transformation at the workplace has accelerated.
Cement: companies
have informed that cement prices have firmed up across regions in Oct'20 and
were up by INR10/bag over Sep'20 on average - despite the quarter being a
seasonally weak one.
Healthcare: Despite
the COVID-led impact on the Domestic Formulation (DF) segment, the intensity of
YoY decline is gradually reducing in Acute therapies with an increase in
patient-doctor-MR connect. Operational cost-saving benefits are expected to
continue over the medium term.
Capital Goods: Managements
across the board attributed to recovery in the Products business being faster
v/s the Projects business.
Textile sector outlook
As per a recent note by Motilal Oswal
Securities, earnings visibility has improved across players in the textile
sector. The Home Textile industry witnessed a strong demand revival during
2QFY21 on high demand from big retailers. Apparel/Fabric/Yarn players are
tail-riding on an industry revival: These players may benefit from a paradigm
shift in demand to India, huge build-up of pent-up demand and benign raw
material prices. The USD:INR is depreciating at a faster pace than the USD:RMB,
which has made Indian exporters competitive v/s the Chinese. demand, Indian
manufacturers are increasing capacities and focusing on increasing utilization
levels.
Production linked incentives (PLI) seen as
game changer
The recent measures taken by the Indian
government to promote manufacturing in India as structural positive for Indian
economy. Goldman Sachs in a recent note mentioned—
“We see the “Make in India” (MII) initiative
potentially having a profound impact on India’s economy. Plans to make India
more self-reliant could see the share of manufacturing in GDP rise from 17% to
25% over the next few years, creating 100mn new jobs. Knock-on impacts could
see India better develop its consumption potential, boosting earnings for
domestic companies over time.
In a scenario of full implementation, our Macro
team expects real GDP growth to pick up to 8% in the next five years, vs their
base case of 5-6%. The team does not bake full implementation of MII into their
numbers, given the undoubted challenges: improvements in manufacturing
competitiveness, implementation of production-linked incentive (PLI) schemes,
better infrastructure, reforms in labour/land laws, more private sector
participation, continued political will, and growth in exports. In a recent
note, the team noted that Vietnam and India were the most mentioned
destinations as alternates to China for manufacturing.”
Global Macro
USD Outlook:
Goldman Sachs featured views of three experts in a recent note about the
outlook for the US Dollar.
It’s not just the rate of global growth that
matters for the Dollar's value, it’s how global growth compares to US growth.
Even if the global economy is recovering, if US growth outpaces global growth,
the Dollar will remain supported. - Barry Eichengreen (UC Berkeley)
The Dollar’s value surged at the beginning of
the coronavirus recession… but it has lost ground since as the global recovery
has gained traction. This pattern will likely persist... with good news on the
global economic recovery probably weighing on the Dollar… almost regardless of
how the US economy is performing relative to key trading partners. - Zach Pandl
(Goldman Sachs)
By all logic, the Dollar’s dominance in the
global monetary system should be declining… But the reality is that the
Dollar’s position remains as dominant as ever. - Eswar Prasad (Cornell)
Bitcoin: JP
Morgan in the meanwhile admitted its mistake in rejecting Bitcoin as a scam.
From there recent notes however it appears that the brokerage is now inclining
towards accepting the cryptocurrency as an attractive asset.
Eric Peters, CIO of Hedge Fund One River Asset
Management, reportedly proclaimed (about Bitcoin) that "There Is A Vague Sense That Something
Powerful, Apolitical, Transnational, Is Emerging".
Gold: After
major underperformance of Gold ETFs in past three months, many analysts have
started questioning the rally in gold.
Regulation
RBI: Over
weekend, a committee set up by RBI submitted its report, suggesting major
changes in the regulatory framework for private banks, including the ownership
structure and promoter holding norms. The market seem to have received the
recommendation as a major positive.
A dissenting note however came from none other
than the former RBI Governor (Raghuram Rajan) and Deputy Governor (Viral
Acharya). The duo, who are now academicians in the USA, questioned the very
rationale of the proposal. As per them, allowing Indian corporates into banking
sector would be a bombshell. They argue that in the present times, it is even
more important to stick to the tried and tested limits in corporate
involvements in banking.
SEBI: SEBI is
reportedly targeting analysts meets and conference calls hosted by various
listed companies to apprise the participants about the latest developments in
their respective company. SEBI feels that this creates some sort of information
asymmetry as the managements many share some unpublished price sensitive
information with the analysts and large investors participating in such calls
or meets. SEBI is considering making it mandatory for the companies to share
transcripts, notes and details of all such calls to the public withjin
stipulated time in the interest of investors.
Some food for
thought
“One can know a man from his laugh, and
if you like a man's laugh before you know anything of him, you may confidently
say that he is a good man.”
— Fyodor Dostoevsky (Russian Author,
1821-1881)
Word for the day
Fidelity (n)
Loyalty
