Sharp contraction in GDP; Upgrade soon?
FY21 is half done and the macro data available till now shows the hits to the economy because of the coronavirus pandemic. However, there are signs of revival. After the country’s economy contracted by a record 23.9% in April-June quarter, contraction for Q2’21 is expected to be around 8.6% as projected by RBI.
However, recent data suggests brightening prospects for October and if this upturn sustains, the Indian economy may return to growth in October-December quarter, thereby making a case for GDP upgrades soon.
Global Stock Markets
Despite the pandemic, the global stock markets (especially the US market) continue to be on steroids driven mainly by excess liquidity, positive sentiment post Joe Biden’s victory and also recent announcement by Pfizer and Moderna on positive vaccine update.
A Biden win possibly results in lower trade uncertainty, lower visa restrictions for IT sector and potentially stronger EM foreign exchange. This should result in funds moving from Developed Markets to Emerging Markets of Asia and India. The above fact is visible from the FII inflows witnessed in the last month and so far in November (given below)
|Month in 2020||Net FII Inflow/(Outflow)|
Indian Stock Markets
Recent domestic high frequency indicators like Manufacturing PMI, GST collection, Personal mobility sales etc. witnessed reasonable improvement. A strong recovery was seen across sectors led by lockdown lifting, pent-up demand and resumption of industrial activities. In addition, expectations of a stimulus package from the government and firm global cues have helped the Indian markets to scale all-time highs in the last few days.
With this a new record has been set wherein markets have witnessed Decade-lows of 7500 in March and life-time highs of 12500+ levels in Nifty in the same year. This recovery has left many in awe, however, as we have tried to explain earlier also, markets always price in what will happen 3-6 months in advance and considering the steep recovery witnessed across industries + the strong dose of liquidity + the likely news of vaccine coming in, they have scaled new highs.
The September quarter earnings (Q2’21) for corporate universe were better than expectations. Revenues for the quarter de-grew just by 9% Y-o-Y whereas they witnessed 35% Q-o-Q growth but EBIDTA improved 20% Y-o-Y and more than 52% Q-o-Q on the back of lower RM costs on account of lower commodity prices and fall in other expenses related to travelling and marketing. Another notable fact was that August and September revenues were either on par or witnessed growth Y-o-Y across industries with the trend continuing in October month as well.
The results season began on a robust note with solid outperformance from IT sector on the back of results by TCS, Infosys etc. Pharma (international sales) and FMCG (volume growth) reported decent Y-o-Y growth in revenues. However, the highlight of the season so far have been private banks which were buoyed by solid results by large players resulting in robust rally.
Other sectors like Cement, Auto, Chemicals, Consumer Durables, Real Estate, Textiles and Fertilisers did very well in the quarter gone by.
Irrespective of all the above macro details mentioned above, the only thing that matters for making money in stock markets is the underlying growth/fundamentals of your portfolio companies. As you know, we have been taking a lot of portfolio structuring changes (which are conveyed via separate email) which have yielded very positive results over the last 8-10 months. That in addition to the following points give us confidence for maintaining the recovery in our performance.
- Considering the fact that most of the companies in our portfolio are industry leaders in their segments and with better balance-sheets they should continue to do well during ongoing challenging times.
- Most of the industries where we are present are immune to economic slowdown inspite of COVID impact as witnessed by H1’21 results where they not only significantly improved sequentially (meaning compared with June quarter) but also delivered better results YoY (meaning compared with Sept 2019 quarter (please see the attachment).
- Valuations comfort – inspite of the increase in share price across most of our portfolio companies, valuations have not increased i.e. most of the increase is led by growth witnessed in earnings.
We would like to end the update with the following quote:
“I’ve found that when the market’s going down and you buy funds wisely, at some point in future, you will be happy” – Peter Lynch
Result update of our portfolio companies is attached for your reference. Happy Investing!!