Record-breaking
quarterly numbers might remain history as the next challenge will not be demand
but inventory management
The liquidity-pumped
euphoria is showing signs of wearing out. The best-ever revenues, volumes, and
profit in the March 2021 quarter produced by many companies are not generating
the enthusiasm unleashed end of last calendar year. The market was flat in the
past month to 7 May 2021. The benchmark had rebounded from the March 2020 multi-year
low of 7,610 points, buoyed by RIL’s Rs 2-lakh-crore fund-raising through 33%
stake-sale of Jio Platforms in less than two months from end April and a rights
issue thereafter. After stabilizing at the 11,600 level for three months from
August 2020, the Nifty shot up 30% in the subsequent four months to touch a
lifetime high mid-February 2021. HDFC Bank, a proxy for economic health, surged
41% in the period. Bajaj Auto, capturing discretionary spend, gained 34%.
Grasim, symbolizing industry consumption, advanced 64%. Hindalco, a play on the private and public
investment mood, improved 75%. Tata Steel, pointing to infrastructure capex,
surged 66%. The tailwinds were the signs of spring in the June 2020 quarter
results, which started trickling mid-July, after a 21-day nationwide lockdown from 25 March
2020 had knocked down Q4 of FY 2020 earnings. The catalyst was expectation of a
better Q2 due to a normal southwest monsoon and festive spending in Q3. The
second US$900-billion stimulus from the US end December 2020 put more cash with
overseas investors.
The
benchmark shed 2% in little less than the past three months despite a third
fiscal stimulus of US$1.9 trillion by the US in March. HDFC Bank tumbled 31%
and Bajaj Auto lost about 6%, reflecting the setbacks to the banking and
automobile sectors. The Supreme Court end March 2021 lifting the moratorium on
servicing loans from September 2020 triggered fears of ballooning of advances turning sour as
Indian states enforce region-specific shutdowns. HDFC Bank’s gross non-performing assets were up in Q4 over Q3 and over the year. Two-wheeler makers froze assembly
lines as chips became scarce. Profit-booking from pharma, automobiles, and tech
counters, the recipients of attention as public transport was curtailed to cap
the spread of the pandemic, is making way to commodities, which will be at the
forefront to benefit from normalcy, and because of a soft dollar. Grasim returned
17%, Hindalco 26%, and Tata Steel 63% over the past quarter till the first week
of May. There are three messages that the market is giving. First is the doubt about
the sustainability of current valuations. The outbreak and retreat of the virus
is uneven across the world. The US and some parts of the EU are emerging from the
emergency for the third time. India is facing a second surge. A fourth wave has
overwhelmed Japan’s healthcare system. The Nikkei index tanked 3% on 11 May
2021. Travel restrictions enforced to isolate countries engulfed in the flare-up
will worsen the disruptions in distribution. The second outcome is economies getting
caught in the crossfire of uncoiling prices and fragile recovery. Stimulus
packages have improved consumption but not employment as enterprises focus on keeping
overheads low. US retail selling tag in April jumped to 4.2% over the year and from
2.6% in March. The rate was the highest since CY 2008. On the other hand, the
number of unemployed is not dipping to show return of routine. Businesses are
unable to cope with the release of pent-up demand due to difficulty in
procuring raw materials.
The Federal
Reserve wants 2% inflation to be persistent and vacancies to slide to the
pre-March 2020 era before beginning to hike the cost of funds. In the meantime,
it might start withdrawing from bond-buying to mop up liquidity. The European
Central Bank is toying with the idea. India needs continuation of loose money
policy as it is projected to see yet another round of higher caseloads. The Reserve
Bank of India might be left with little room if there is an acceleration in the
outflow of foreign funds, smelling higher yields back home. The third
fallout will be volatility in earnings. Q1 of FY 2022 results, while expected to
be better than a year-ago, are not likely to be accompanied by pronouncements
of record-breaking milestones because of varying degree of impact of localized
lockdowns. The dilemma will be whether
to pass on the higher input bill or focus on volumes. Inventory management will
become complicated. Supplies tied up during revival will have to be disposed of
at a discount if yet another resurgence paralyses economic activity. Investors
and companies have never faced such a balancing act.
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