Shrugging off setbacks

The damage due to external shocks can be temporary as the recovery of the economy and two stocks demonstrate

Investors who have faith in the India Growth Story are having the last laugh. The S&P BSE Sensex climbed up to a record high on 16 January 2020. The benchmark accumulated 2.61% in less than one-and-a-half month since the Reserve Bank of India on 5 December cut the growth forecast to 5% for the current fiscal during the December policy. The mainline index went up 1.24% after the IMF on 17 December warned of significantly revising down India’s projection of 6.1% economic expansion. The stock market barometer appreciated 8.73% following the World Bank on 13 October tamping down the country’s GDP accumulation estimate to 6%. The surge in frontline stocks, majorly due to buying by foreign investors fattened on the profit from the three US indices hitting new peaks day after day, is now percolating to the broad market. The mid-cap and small-cap indices gained about 3.2% each in the first half of January as against the 1.3% value addition of the headline index. The market has the ability to taste the dish before it is ready to be eaten. It has sensed recovery even as data of past periods were indicating a severe slowdown in investment and consumption. The forward-looking optimism is being vindicated of late. Industrial production rebounded to the positive zone in November 2019 after three straight months of contraction on the back of manufacturing and mining. Freight loading of Indian Railway has increased. Transportation of coal, iron ore and steel, cement and fertilizers is buoyant.

That the economy is gaining traction was reaffirmed by the composite purchasing managers’ index spurting in the month to December on strong manufacturing and services output, with the services PMI climbing up to a five-month high. Private sector jobs across the sectors ballooned for the 29th month in a row in December and to the greatest extent since August. Despite headwinds, sales volumes of the residential segment in the top eight cities expanded 1% in 2019 as affordability improved and developers aligned themselves with the needs of home-buyers by reducing ticket and unit sizes. New residential unit launches were up 23%. The office market recorded its historic best year by transaction volumes. Foreign exchange reserves jumped to a record US$ 461.16 billion at the start of 2020 and should embolden the Union government to issue sovereign bonds to meet its commitment in public-private funding for infrastructure. Investors staying put in Infosys despite allegations of financial impropriety raised by whistle-blowers in H2 of CY 2019, too, must be relieved. The stock amassed around 16% since the first of the complaints about unethical practices surfaced on 21 October and outperformed the BSE IT index’s gain of around 7% till the end of the first fortnight of January 2020. An internal audit committee found no merit in the charges of inflated visa costs, improper revenue recognition, reversal of certain provisions and non-disclosure of key information. On top of it, the IT bellwether unveiled estimate-beating December 2019 quarter results and revised upwards its FY 2020 revenue outlook.

Bharti Airtel illustrates how fortunes can undergo a transformation on reversal in sentiments. The stock bounced back nearly 47% from its October 2018 low in over 14 months, with nearly half of the value coming since 27 October 2019, a day after the apex court ruled that sales of telecom services providers should include those from non-core activities. Telecos have to share with the government 8% of their gross revenues as licence fee and 3-5% as spectrum usage charge. The counter held steady even after the Supreme Court upheld its earlier order. Its US$2-billion equity issue was subscribed three times by `quality’ qualified institutional investors despite provision of Rs 28450 crore to pay the outstanding dues resulted in a loss of Rs 23.045 crore in the September 2019 quarter, the highest and second quarterly loss in 14 years compared with profit of Rs 118 crore a year ago. Besides making up the deficit in payment of statutory levies, the proceeds will be used to augment long-term resources and strengthen the balance sheet, for servicing of short- and long-term debts, capital expenditure and long-term working capital requirement. Two rounds of tariff hikes, in November and December, were taken and the minimum monthly recharge for prepaid users by Rs 10 more than a year, offering revenue visibility to investors. What the three episodes have demonstrated is that collateral damage due to external shocks such as shake-up in the regulatory environment cannot last as long as the underlying foundation is strong. 

-Mohan Sule