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Published on: Feb. 16, 2021, 9:22 a.m.
Much more than a relief rally
  • A stock specific strategy rather than an index base is likely to pay better returns

By Daksesh Parikh. Executive Editor, Business India

There is a popular saying in the market which, translated from Gujarati, roughly means, never try to be a hero ahead of the exams, implying that second guessing a major event and acting on it can be disastrous. FIIs, many of which have scoffed at traditional brokers, learnt the logic of this statement the hard way. In the five session ahead of the budget, from 23 January, they started selling in a big way. They cumulatively sold to the extent of around Rs12,700 crore. The selling started a day before the F&O settlement and lasted till budget day. Post the budget the tide turned with the Finance Minister announcing a growth oriented budget with growth taking precedence over the earlier obsession of curbing the fiscal deficit. Realizing their folly, FIIs not only covered up their sales in the first five sessions in February but also brought in Rs1,000 crore more than all they had sold in the last five sessions. 

This was one of the major reasons for the sharp swings in the Sensex, which after making an intraday high of 50000 on 21 January, made an intraday low of 46160 on the day before the budget was announced. And, in the five subsequent sessions also made a strong move to touch an intraday high of 51000 on Friday, 5 February. The post-budget rally, in a way, was much more than a relief rally. FIIs have again resumed their buying with vigour. Apart from the shenanigans of the market players and the relief that no additional taxes were to be collected from any sections, there was a flow of very good corporate reports this fortnight. 

In early January, it was dominated by the better than expected results of the IT majors including TCS, Infosys, Wipro and Tech Mahindra. This time, it was the finance sector, in particular the banks, NBFCs and cement sectors. In the case of cement, two outstanding results were those of Shree Cement and UltraTech. Shree Cement saw a sharp rise of Rs4,000 per share soon after the results were announced and it made a 52-week high of Rs27,476 on 4 February. Its operating margins for the quarter ended December were the highest amongst large cement companies at 34.36 per cent as compared to UltraTech’s 24.5 per cent and Ambuja Cement’s 25 per cent.

UltraTech, which has become the largest cement company, taking over quite a few companies in the last five years, is in the top six cement companies globally. It has still to ensure that the companies taken over start performing to the benchmark of UltraTech. Its PAT, for the quarter ending December 2020, at Rs1,550 crore, is however 2.5x that of Shree Cement. UltraTech made a new all-time high of Rs6,400 on 5 February. Its market cap of Rs1.83 lakh crore is more than twice that of Shree Cement. However, the combined cap of ACC and Ambuja Cement is lower than Shree Cement.

The scrappage of the old cars policy, a mention of which was made in the budget, saw automobile company shares going gaga. Tata Motors and Mahindra, amongst the largest car makers globally, saw their share prices going through the roof. Better than expected results contributed to this bullish move. Tata Motors reported a PAT of Rs2,940 crore for the last quarter ending 31 December, 2020,on a consolidated basis.

This saw share prices making a record high of Rs342 on 3 February. Mahindra and Mahindra’s shares also hit a 52-week high of Rs894 on 4 February and although the consolidated profit was lower, its market cap was higher than that of Tata Motors. M&M has also proposed disposing off its loss making Korean company. Ashok Leyland, largely into commercial vehicles, hit a new yearly high of Rs138 although the results for the quarter are not yet out. They have been scheduled for 11 February.  

Focus on investment demand

One factor which really made the market euphoric was the budget focus on capital spending. The earmarking of nearly 20 per cent of outlays on capital expenditure in building new road, rails and ports saw many companies directly or indirectly connected with projects being rerated. The markets reckoned there was a good possibility of the country’s GDP growing by an average of 8 per cent over the next five years if both growth cylinders of consumption and investment started working in tandem.

The government was still the only major investor in setting up new projects as the private sector has shied away from investing more funds for setting up new capacities. In spite of that, cement, metals have already been on fire, in particular steel and aluminium. Concessions made to importers on stainless steel and other steel products failed to dampen the rally in steel prices.

Tata Steel has not made much headway in selling off its European IJmuiden plant with Swedish steel major Saab recently walking away. One of the reasons given was that customers of SAAB insisted on fossil-free steel. While green steel is slowly gaining ground in Europe, Tata Steel has yet to make the desired headway in both its plants in Europe and the UK. This despite the fact that the IJmuiden plant in the Netherlands is one of the better run plants in Europe.

Green steel production started as a fad, but is now being taken seriously by sections of consumers, especially the younger generation. The budget has also made a proposal to have a hydrogen policy for the country. India, given its huge hydro-power producing capacities, can make faster headway in using hydrogen as a fuel as compared to coal. However not much of a breakthrough has been made in the storage of hydrogen, although lot of research has been taking place world-wide. 

Tata’s renewed India-centric focus has, however, helped the company. Steel Authority of India – the biggest steel maker in the country – saw a large turnaround in its fortunes. For the first nine months of the year the company made a PAT of Rs404 crore as against a loss of Rs703 crore in the corresponding nine month period ended 31 December, 2019. Company shares have gone up by 400 per cent since their low of 21 in March 2020. Tata Steel, which has a market cap of nearly three times that of SAIL, has yet to declare its results for this quarter. Post the declaration of its results, brokers feel that it may well cross the Rs731, 52-week high made in early January this year. 

Most Tata shares are soaring this year, with Tata Consumer and Tata Chemicals also moving up. Tata Consumer Products and Tata Chemicals both traded close to their 52-week highs made in January. For Tata Consumer this will be the second quarter of results post the takeover of the Tata Chemicals consumer businesses.  

  • Bajaj Electricals, which also reported very good results, saw its prices jump to cross Rs900 and make a new high of Rs921. The company had previously raised funds through a rights issue from its shareholders

Construction companies

For building infrastructure, the markets rightly focussed on large construction companies which had the financial muscle to take on exposure in building infra projects. L&T was a natural choice. The day after the budget was announced L&T shares hit an all-time high of Rs1,593. The company reported PAT of Rs2,858 crore for the third quarter. In the earlier quarter it had booked the gains on the sale of its electric and automation division to Schneider Electric India Pvt Ltd. The company had an order book of Rs3.31 lakh crore at the end of the nine-month period. While this is not much above the earlier period’s order book, representing just an eight per cent rise, the potential of getting more orders, both from the public and private sector, has seen renewed interest. Even now infrastructure projects account for the bulk of the order book, at 57 per cent.

The company, on a consolidated basis, reported an operating margin of over 11 per cent, which is very good in the construction sector. Operating margins in infra projects have been low but with most infra projects being undertaken by government and semi-government bodies, safety of capital is ensured. The highest margins are in the engineering sector. 

Bajaj Electricals, which also reported very good results, saw its prices jump to cross Rs900 and make a new high of Rs921. The company had previously raised funds through a rights issue from its shareholders. Good results are, however, not a guarantee for sharp rises. Zee Entertainment is one share which despite very good results saw its share price dip sharply post the announcement of the quarterly results. There were rumours that the company is evoking a great deal of interest from other Indian companies who are looking at its rich content. Normally, before announcing any moves in a takeover target, the promoters of companies taking over try to get a chunk of shares.

Besides private companies, the large PSUs are also being rerated. February/March spells dividend time for investors as many companies which are largely owned by the government, pay interim dividend to shareholders before the end of the year. IOC, which declared Rs7.50 per share has recently gained 10 per cent to cross the Rs100 mark. Coal India, REC, HPCL and BPCL are amongst the other good dividend paying companies. For investors looking at safety of capital and a steady return, PSUs offer good dividend yield play. 

The next fortnight promises to be an eventful one, with many large companies announcing their results and giving their prognoses of the coming year. With RBI continuing with its accommodative stance in its recently announced policy, the firm trend is expected to continue. A stock specific strategy rather than an index base is likely to pay better returns.

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