The coming third wave

 

If the rebound rode on growth stocks and reopening boosted value plays, vaccination is set to prop up services

 

 The March 2021 quarter results were always expected to be an improvement over the low base of a year-ago period. A 21-day nationwide lockdown from 25 March last year had disrupted economic activity. An inkling of the coming boom was visible in Q2 and Q3 of FY 2021 numbers, reflecting the five-phase unlocking from June. The market, too, anticipated a healthy outcome. The Nifty scaled a lifetime high on 15 February of this year. Release of the bunched-up demand cannot be the only explanation for the record revenues, volumes, and profit by many companies. Several other factors converged to produce a memorable January-March 2021 period. The impact of the Union government’s cash transfer to farmers and rural and urban poor became visible in the marketplace. Focused spending on agriculture, healthcare, education, and infrastructure and reforms to ease doing of business were the other cornerstones of the aid package. The central bank, simultaneously, was lowering the cost of funds and undertaking targeted lending to sensitive sections with the capacity to magnify the assistance. Staring at credit crunch after the collapse of infrastructure financier IL&FS in September 2018, the gushing liquidity was a turning point for lenders to home buyers, farmers and MSMEs. Also emboldening banks was the implementation of the Insolvency and Bankruptcy Code from September 2020, freeing resources tied up in bad loans. Peak corporate tax was cut 22% from 30% in September 2019. Coinciding with the man-made efforts, a second consecutive average southwest monsoon improving rural purchasing power.

The two other catalysts, both in January 2020, were the thawing of the two-year-long US-China tariff tiff, with the phase 1 trade agreement, and the UK formally leaving the European Union, three-and-a-half years after a referendum. A deal for an orderly exit was finalised before the year-end deadline. The transition to BS VI norms from April 2020 cleared another overhang since 2016, contributing to spurring consumption and investment that had got stalled in FY 2020.  If MSMEs were able to tap low interest rates, institutional investors were snapping the downsized shares of large and medium corporations. The decline in input and overhead costs provided flexibility to deleverage, strengthening the balance sheet for funding growth. Tinkering the output mix towards premium products increased realization. Establishing a digital presence offset the drop in physical footfalls. Besides the need to meet higher usage, the coverage of production-linked incentives encouraged many companies to look for ramping up capacity as utilization touched the optimum level.  Gains made their way from growth to value counters, punctuating the market’s overheating. A vibrant primary market signalled risk-taking.

 

If the escalating benchmarks foretold Corporate India getting into shape, their current movements offer hints of outlook. The Nifty P/E has slowed to around 29 from a high of 41 mid- February. Apart from spurt in earnings, the contraction in the premium over the historical average of about 22 suggests a slower pace of returns as raw materials turn expensive and logistics issues persist. The Nifty IT index lagged over the past month on fears of recoiling inflation leading to tapering of prime pumping in the US and the EU, the major markets. The Nifty Auto index’s outperformance, despite down from its peak, captures the struggle to obtain chips as well as hopes of CVs catching up with PVs and two-wheelers on normalcy. Tie-ups to churn out covid-19 vaccines and medication are once again propping the Nifty Pharma index after a brief hibernation, when the first wave had started receding in H2 of FY 2021. The Nifty Bank index has doubled from its year-ago bottom, coming out of correction. Provisioning and capital collection are supposed to facilitate higher credit flow. The Nifty Metal and Commodities indices are touching new tops due to the revival of capex and prospect of another season of bumper harvest. They might plateau as central banks end their loose monetary policies early 2022.  In the run-up, attention will shift to the third orbit comprising frontline sectors including aviation and hospitality. The leaders in the entertainment and retail space are up from their pandemic lows and holding on to their gains. Services is consolidating the comeback of the US, initially fronted by tech and then by manufacturing, with outdoor masks no longer required for those inoculated with two doses. The sharp drop in caseloads and estimates of all Indian adults getting two jabs by December 2021 are setting the stage for funds to move into the next upcycle.

 

 --- Mohan Sule