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Published on: Aug. 10, 2020, 12:52 a.m.
It's not the economy!
  • A bounce in its step. Picture credit: Sanjay Borade

By Daksesh Parikh. Executive Editor, Business India

There are academicians and there are statisticians. The former have, for ages, tried to make sense of market behaviour and the latter have, for years at a stretch, tried to find some degree of correlation between the growth of the economy and the stockmarkets.

Sad to say, neither reliable correlation coefficients nor rational predictable models of forecasting investors’ behaviour have been found. The variable sentiment is the culprit. It refuses to fit into any quantifiable bucket. And unlike the economists who love to qualify, other things remaining constant, there is nothing constant in the markets.

The optimism witnessed in early January which saw the markets reach an all-time high when the Sensex reached 42274 was unfathomable to a rationalist as the economy was already showing signs of slowing down. When fear overtook rationality during the Covid-19 pandemic, the market dropped to a 52-week low of 25639.

Currently, the Sensex has recovered almost 50 per cent of the loss and is hovering around 38000. At this level it is less than 10 per cent below the January highs. The pandemic is still spreading and has already crossed 20 million and is growing at over 50,000 patients a day. Indian operators of yesteryear, used to be fond of educating novices: “Respect the price, don’t try and rationalise the price movements.”

In March the FPIs of one of the major market movers had withdrawn nearly Rs62,000 crore from the markets. To give a perspective the average annual investments during the calendar years over the last 10 years, 2010-2019, were R53,600 crore. In May, they sold under Rs7,000 crore. The FPIs have since returned to make up for the lost chance and pumped in Rs36,000 crore in June and July. August has just started. The world over, Indian markets are recovering faster than the other BRIC countries except China, which has seen a 16 per cent YTD rise. Brazil is still down by 32 per cent and South Africa is down by 22 per cent.

Reliance Industries was, of course, the turning point and the huge amount of money from marquee investors changed investor perception about Indian markets. The only company to have raised money at the height of the Covid crisis both from corporates overseas and India besides inspiring investors, also proved that there was ample liquidity with investors. Post the initial panic, investors were looking at picking up quality stocks at bargain-basement rates. It is but natural that given the uncertainty of the pandemic, money will flow into the top 20-25 stocks. It stands to reason that in uncertain times you go for the most liquid asset, like gold or their cousins, gold-like company shares.

Unlike the popular perception, it is not banks and the finance sector but the IT sector which has been at the forefront of the rally this time round. The IT index has gone up by almost 68 per cent from its low while the Bankex has gone up by 33 and BSE Finance by 36 per cent. Infosys in IT has been at the forefront of the rally. Its shares have the highest free float of 87 per cent and it is the biggest mover, often interchanging place with Reliance Industries. Infosys has gone up from a low of Rs511 to Rs951 which is an almost 87 per cent rise. Reliance has gone up by 147 per cent and is currently at Rs2,146. While banks and finance have the maximum weightage amongst the BSE Sensex, IT may not be far behind, considering its contribution to growth. In the month of July, Nifty IT gave the highest returns of 23 per cent. All others, except pharma, were in single digits.

  • Investors have already taken into account the fact that the first quarter of 2021 will be a washout quarter and even the second is likely to see a slow recovery

Reliance has become a desi FANG company. Technology companies, comprising of Facebook, Apple, Amazon, Microsoft and Google, have a combined marketcap of $6.2 trillion (Rs465 lakh crore), higher than the GDP of most countries around the world except two, including the US.
Non-index shares have also given good returns

Besides index shares, there has been a selective rise in several non-index shares. More than the categories it is the quarterly performance which has led to a sharp rally. The move towards increased packaged food has also seen a rise in several companies which have actually benefitted from the lockdown. Biscuits were in high demand. Britannia Industries rose to a 52-week high on 31 July, at Rs4,015. The company will hold a board meeting on 17 August to consider an interim dividend and the issue of bonus debentures. The net profit, at Rs515 crore, was more than twice that earned in the comparable quarter in the previous year. Revenues were up by 25 per cent.

Another consumer company which came up with notable performance despite the logistic problems in the lockdown in many places in April and May was Tata Consumers (earlier Tata Global). The company, which took over the foods division of Tata Chemicals, reported a 13 per cent rise in the top line, Rs2,714 crore, largely due to the improved performance in May and June. PAT was higher by 82 per cent at Rs346 crore.

Besides tea and coffee, the company is now moving fast in packaged food goods like salt and pulses. In May, it took over Pepisco’s stake in NourishCo. The company, with a market cap of over Rs47,000 crore, reached a 52-week high at Rs530 on 7 August. Lot of hope has been built in this company which is reflected in the high P/E of nearly 96x. Dabur, another company with a strong marketing setup on the rural side, is trading at Rs515, also close to its 52-week high reached in March 2020.

All FMCG companies have not grown at the same pace. Pidilite, which was adversely impacted by Covid-19, saw a surge in prices despite poor performance in the first quarter. The company took over a 70 per cent stake from an Italian company, Tenex Italy, in its Indian subsidiary Tenex India Stone Products. Tenex’s portfolio includes adhesive coating, surface treatment chemicals, abrasives for marble, granite and stone products.

While steel and cement companies have yet to recover from the impact of Covid-19, prices of zinc and copper have started firming up. Hindustan Zinc, which mines both zinc and silver, has seen its prices double to Rs257 from its low of Rs122 in March. Aviation and hotel industries are still suffering from the impact of the lockdown. Indian Hotels, which reported a loss of Rs238 crore in the quarter ended 30 June, saw its share prices plummet to a low of Rs78. Its restructuring efforts, which included cost containment, better asset management of inventories and overall optimisation, helped in containing the losses. Occupancy on total (managed and owned) assets which had dropped to 4 per cent, has again started recovering and is currently hovering around 21 per cent.

One industry which has been growing despite the pandemic is the speciality chemical industry. Bayer Agro Chemicals, Atul, Deepak Nitrite, Gujarat Alkalies, Navin Fluorine, Balaji Amines, Camlin Fines and Shree Pushkar Chemicals and Fertilisers are some of the shares which are being rerated by investors.

Investors have already taken into account the fact that the first quarter of 2021 will be a washout quarter and even the second is likely to see a slow recovery. It may be some time before pre-Covid normalcy is restored. Many companies will have to adjust to the changing environment to remain relevant. Those which do not may have to either sell out or restructure their products and division portfolios. The rural income increase may pare some of the lower consumption demand which is likely to be seen in the next two quarters. Two main sectors which will really feel the pain are the construction sector and banks. To what extent one will see a rise in NPAs is anyone’s guess. But hopefully, things may not be so bad with a few sectors recovering faster than others. For now, one may have to ride the hope rally and ensure that the pain will subside in the coming years.

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