Nifty view : Trekking markets & more

market-economy

Ethanol, EV, and Reliance

In its latest Annual General Meeting, Mr. Mukesh Ambani, Chairman of Reliance Industries announced an ambitious plan for setting up new energy business. The plan includes building four Giga factories to produce photovoltaic modules, advanced energy storage batteries, electrolyzers for the production of green hydrogen; and fuel cells for converting hydrogen into motive and stationary power.

The announcement has added more energy to the already popular trade-in alternative and new energy. Even though the media narrative has been more focused on renewable energy and electric mobility, from the stock market perspective, the most popular trade has perhaps been in the sugar manufacturers who have set up decent ethanol manufacturing capacities in past one decade or so.

The general view so far is that the EBP shall enhance the profitability of the sugar companies materially and also reduce the volatility in their earnings. However, the forecasts made by various analysts might not be fully factoring in many emerging trends in their calculations.

Also, sugarcane being a highly water-intensive, and therefore energy-intensive, crop in India, the more sustainable solution to the current account and carbon emission would be electric mobility. The purpose is not served meaningfully if the electric vehicles are run on the power generated by thermal plants using the imported coal.

However, the question “Should we be buying the stock of Reliance Industries?” lies totally outside my domain. The readers may look elsewhere to find an answer to this!

(Read more)

Plan for “With Covid World” and not “Post Covid World”

I strongly feel that post Covid19 world may be a realty in this decade. It may even take couple of decades to materialize. It would therefore be pragmatic to “prepare to live with Covid19”. In fact this thought has already started to gain currency.

We in India also need to accept Covid19 as a long term companion, and prepare to live with it. The preparations must be done at the following five levels.

(Read more)

More inside this issue

 

Market outlook for this week

The daily and weekly technical outlook & trend for Nifty remains “Neutral” for this week. However, the monthly trend is now marginally negative. The outlook and trend for Bank Nifty however remain positive on daily, weekly and monthly time frames.

(Read more)

Brokerage views

The macro data remained mixed this week. The current account balance came little worse than expected. BOP moderated sharply in 4QFY21 led by widening trade deficit and tepid capital flows. The core sector growth also moderated in May. Manufacturing PMI recorded a contraction after 11 month in June. However the belief in the cyclical recovery remained strong. There is a broad consensus that India is embarking on a long investment cycle led by both government’s infra spending and private capex on capacity addition and upgrades. Another area of broad area of consensus is a sustained upcycle in IT services, led by both pricing and volumes.

Whereas the popular trade is moving towards the recovery in the investment cycle, the debate over the sustainability of “reflation trade” that started a year ago. The indication by the US Fed that its inflation tolerance are getting tested, have led to sharp correction in global commodity prices.

FY21 has been one of the most challenging years for Indian economy. However, the year has drawn to a satisfying close insofar as the corporate earnings are concerned. Nifty EPS recorded a 15% growth over FY20, despite many challenges. FY22 earnings growth is expected to be much higher. The markets have however anticipated that and appear mostly pricing in the superior earnings growth. The margin for error appears very thin at this point in time.

(Read details)

Indian Market (Equity)

Indian markets corrected in line with global peers as the fears of reemergence of Covid19 spread globally. Stern comments of Chinese premier at the communist party summit also impacted the sentiments. Defensives like pharma and FMCG were top outperformers for the week, while cyclicals like metals, financialsand energy were major losers. The market breadth was even, but small caps continued to outperform. Yields were higher and INR weakened against US. The level of activity was above average. Volatility continue to fall.

(see more)

Indian Market (Debt & currency)

Benchmark yields were higher marginally, so were overnight rates. INR continued to weaken against USD, but was stronger against GBP, EUR and JPY. Ultra Short term funds top performers for the week as the yield curve continue to steepen at longer end.

(see more)

Commodity Corner

Commodity had a mixed trend this week. Energy prices generally higher, with coal and natural gas topping the chart. Silver did best amongst precious metals. Whereas amongst base metals, Aluminum and Lead were top performers; Copper ended lower. Sugar & Soybeans were top gainers in agri produce; Corn was top losers. Steel was higher.

(see more)

Global Markets last week

Global markets had a mixed trend this week. US and German equities ended with gains, while Asia Europe ex Germany were mostly down. USD gained some strength, Cryptoes were higher, so were precious metals. US bond rally continued strongly; volatility was lower.

(see more)

Charts of the Week

                                   Nifty view : Trekking markets & more 

Ethanol, EV and Reliance

In its latest Annual General Meeting, Mr. Mukesh Ambani, Chairman of Reliance Industries announced an ambitious plan for setting up new energy business. The plan includes building four Giga factories to produce photovoltaic modules, advanced energy storage batteries, electrolyzers for the production of green hydrogen; and fuel cells for converting hydrogen into motive and stationary power.

The announcement has added more energy to the already popular trade in alternative and new energy. Even though the media narrative has been more focused on the renewable energy and electric mobility, from stock market perspective, the most popular trade has perhaps been in the sugar manufacturers who have set up decent ethanol manufacturing capacities in past one decade or so.

The Government of India had announced an ambitious ethanol blending program (EBP) in 2018, through a National Policy on Biofuels-2018 (NPB-2018). The program included interest rate subvention for setting up molasses and grain-based distilleries (DFPD). The Bureau of India Standards (BIS) prescribed standards for E5 (95% Petrol and 5% Ethanol), E10 and E20 blends of ethanol and petrol. Initially the target was set to achieve E20 stage by 2030 in line with the Sustainable Development Goals (SDGs). However recently, the E20 target date has now been advanced to April 2023.

NBP-2018 in perspective

To put the NBP-2018 in perspective—

  • At the end of FY21, the ethanol production capacity in India was 426 crore liters from molasses-based distilleries, and 258 cr liters from grain based distilleries.
  • To Achieve E20 target by 2025, India would need a total of 1500cr liters capacity to cater to the blending demand and other demands, e.g., liquor, sanitizer etc.
  • It is estimated that the molasses based capacity shall get increased to 760cr liters (from present 426cr liters) and grain based distillery capacity shall get enhanced from the present 258cr liters to 740cr liters by 2025.

Obviously, the larger focus would be on grain based distilleries rather than sugar based distilleries. To produce the required ethanol to E20 target, total 6 million MT of sugar and 16.5million MT of grains would need to be sacrificed.

  • Technically E20 target could be achieved without any significant modification in the vehicle design. However, when using E20, there is an estimated loss of 6-7% fuel efficiency for 4 wheelers which are originally designed for E0 and calibrated for E10, 3-4% for 2 wheelers designed for E0 and calibrated for E10 and 1-2% for 4 wheelers designed for E10 and calibrated for E20. However, as per SIAM, the efficiency loss could be further reduced through some modifications in engines (hardware and tuning). SIAM has assured that E20 material compliant and E10 engine tuned vehicles may be rolled out all across the country from April 2023.
  • The present transportation fuel consumption mix in India is 65% Diesel, 28% Petrol and 7% Jet Fuel. NBP-2018 addresses only the petrol blending.
  • The dispensing pump infrastructure would need to be developed to enable dispensing of E0, E10, E20 and E20+ separately. Presently, only a handful of fuel stations are equipped to dispense the variety of blends. Besides, the entire supply chain and logistics of OMCs needs to be augmented to store, handle and dispense different blends.

Objectives of NBP-2018

From various discussion papers and policy documents, it is not clear what is the primary objective of the EBP. A plain reading of NPB-2018 would suggest that the current account deficit is the primary driver of EBP.

As per “The Roadmap for Ethanol Blending in India 2020-2025”, published by NITU Aayog, “India imports 85% of its oil requirement. The Indian economy is expected to grow steadily despite temporary setbacks due to the COVID pandemic. This would result in a further increase of vehicular population which in turn will increase the demand for transportation fuels. Domestic biofuels provide a strategic opportunity to the country, as they reduce the nation’s dependence on imported fossil fuels.” The positive impact on environment is mentioned as an incidental benefit.

However, at places energy security and commitment to emission reduction under SGDs are also mentioned as primary objectives of EBP.

It is pertinent to note the following in this context:

  • EBP, in its present form addresses only 28% of India’s fuel mix, i.e., petrol used as transportation fuel. It does not address the more polluting diesel which forms 2/3rd of India’s transportation fuel mix.
  • To achieve E20 target, about 50% of the ethanol requirements would be met through sugar based ethanol. Sugarcane is highly water intensive crop. In that sense, it would not be environment friendly to increase the acreage of sugarcane crop.

Secondly, sugarcane is not an all India crop. Most of the sugar cane is produced in three states, viz., UP, Maharashtra and Kanataka. Tamil Nadu, Andhra Pradesh, and Gujarat, and some other states are minor contributors to sugarcane crop. Naturally, most of the ethanol producing capacity is located in UP, Maharashtra and Karnataka. Transporting this ethanol to various locations for blending and storing it there, could be a significant energy consuming effort in itself. Storage is even more critical since sugar is a seasonal industry. Most of the molasses is produced between November and March, while the consumption would take place 365days in a year.

The role of grain based distilleries therefore could be more important than the sugar based distilleries over a longer period. This brings me to the other area of reforms which is work in progress.

As per the 01 May 2021 press release of the Press Information Bureau (PIB), “With the vision to boost agricultural economy, to reduce dependence on imported fossil fuel, to save foreign exchange on account of crude oil import bill & to reduce the air pollution, Government has fixed target of 10% blending of fuel grade ethanol with petrol by 2022 & 20% blending by 2025.”

It further reads, “To increase production of fuel grade ethanol and to achieve blending targets, the Govt of India has allowed use of maize and rice with FCI for production of ethanol. Government has declared that rice available with FCI would continue to be made available to distilleries in coming years. The extra consumption of surplus food grains would ultimately benefit the farmers as they will get better price for their produce and assured buyers; and thus will also increase the income of crores of farmers across the country.”

While EBP addresses a part of the current account problem, the implementation of three laws to reform the farm sector in 2020, could potentially address the fiscal deficit problem by improving the condition of the agri economy. Reforming the Food Corporation of India (FCI) by restricting its role to maintaining a strategic food reserve and substituting the public distribution system (PDS) of providing subsidized ration to poor with direct cash transfer (DBT) may result in significant savings for the government. However, this shall mean redundancy of the system of minimum support price (MSP) for wheat and rice. A strong demand vertical for wheat and rice in the form of grain based distilleries could be a good facilitator in this reform process.

Ethanol could impact the fiscal balance adversely at least in initial years. As of now Petrol is not covered under GST regime, whereas ethanol attracts GST. The GST on ethanol works out to between Rs 2.28– 3.13/litre, while the central excise duty on petrol is approximately Rs 33/litre. As per various estimates, E20 EBP might result in direct revenue loss of

Rs100bn to the central government. Besides, poor fuel efficiency of blended fuel may need further subsidies to motivate the adoption of E20 fuel.

Sugar to ethanol – impact on sugar companies

The general view so far is that the EBP shall enhance the profitability of the sugar companies materially and also reduce the volatility in their earnings. In this context it is pertinent to note that-

  • The government took care of volatility in sugar prices, and hence earnings of the sugar producers, by prescribing a minimum selling price (MSP) for sugar in 2018. The MSP so prescribed affords a minimum profit to the producers, even in the seasons when the sugar production far exceeds the demand.
  • The EBP is expected clear the excess sugar inventory and restore the demand supply balance in sugar, through diversion of 6million MT of sugar to the manufacturing of ethanol.
  • Besides, ethanol pricing under EBP, has made the production of ethanol more remunerative for the sugar mills.

However, the forecasts made by various analysts might not be fully factoring in the following trends in their calculations:

With an area of 5 million hectares, sugarcane cultivation in India is carried out on about 2.6% of the total cropped area. There has been a steady growth in area under sugarcane cultivation in India. The sugarcane acreage and productivity have increased 1% each in past two decades. The rise in productivity is faster in recent years. The average sugarcane productivity in UP improved from 62MT/hectare in 2014-15 to 81 MT/hectare in 2018-19. The sugar yield of sugarcane in UP, improved from 9.5% in 2014-15 to 11.5% in 2018-19.

At present pricing, ethanol produced directly from cane juice yields an EBIDTA of ~10%, which is half of the EBIDTA yield if ethanol is produced from molasses. It is therefore less likely that mills will be shifting majorly away from producing sugar at all.

As the sugarcane crop becomes more profitable, we may see further rise in acreage and productivity of sugarcane; in which case the problem of plenty may persist. Besides, in the year of drought when production of sugarcane is low, ethanol might have to take a backseat, impacting the projected profitability of sugarcane companies materially.

The biggest challenge would however come from material fall in global prices of fossil fuels due to popularization of alternatives like electric vehicles, worsening of demographics, and structural shift in travel habits and needs.

Electric vehicle

Sugarcane being a highly water intensive, and therefore energy intensive, crop in India, the more sustainable solution to current account and carbon emission would be electric mobility. The purpose is not served meaningfully if the electric vehicles are run on the power generated by thermal plants using the imported coal.

The salvation therefore lies in materially increasing the electricity generation through non-fossil sources; and developing technology for storage of such electricity using non-polluting sources. Hydrogen cells and other technologies mentioned in RIL vision for future will therefore be critical to achieve multiple objectives of sustainability, energy security, trade balance and fiscal improvement.

It may be pertinent to note that popularization of electric mobility will have maximum impact on Petrol powered vehicles. Diesel powered vehicles may be impacted at a later stage and to a lesser extent.

Now a question would arise, “Should we be buying the stock of Reliance Industries?” Well this is a question that does not fall in my domain. The readers may look elsewhere to find an answer to this.

Plan for “With Covid World” and not “Post Covid World”

The status of Covid19 may no longer be that of a pandemic anymore. A large majority of countries have seen significant decline in the number of active patients, after having experienced the peak of infection cases. The fatality rate has declined materially, especially due to acceleration in the vaccination drive.

However, in past few weeks, many countries in the world have seen reemergence of Covid19 cases in some clusters. Scientists are claiming that the rise in number of cases may be due to mutated variants of the Sars-CoV-2 virus. A fear has been expressed that we may soon see a third wave of the pandemic, primarily due to the emergence of new variants of Sars-CoV-2 virus, some of which might be immune to the vaccines available presently or the doses of vaccine being administered presently.

The pandemic has changed a lot of things in past one year. The lockdown and mobility restrictions have materially impacted our personal, social, and economic lives. There is a great deal of the discourse on how the businesses and societies must “prepare for a post Covid19 world”; much like we have learned to live with HIV – exercising precautions and restraint.

I strongly feel that post Covid19 world may be a realty in this decade. It may even take couple of decades to materialize. It would therefore be pragmatic to “prepare to live with Covid19”. In fact this thought has already started to gain currency. For example, Singapore government is reportedly “preparing its population to deal with Covid-19 as part of their daily lives and people will be able to work, travel and shop without quarantines and lockdowns, even with the coronavirus in their midst.” The Singapore administration believes that “With enough people vaccinated, Covid-19 will be managed like other endemic diseases such as the common flu and hand, foot and mouth disease” as the plans for Singapore to transition to a new normal are outlines.

“Finally, whether we can live with Covid-19 depends also on Singaporeans’ acceptance that Covid-19 will be endemic and our collective behavior. If all of us shoulder the burden together – workers keeping their colleagues safe by staying at home when ill and employers not faulting them – our society will be so much safer,” the ministers was quoted as saying.

I think, we In India also need to accept Covid19 as a long term companion, and prepare to live with it. The preparations must be done at the following five levels:

  1. Personal: Observe Covid19 protocols till 80% population is vaccinated, and herd immunity is achieved. It may take another 12-15 months. Till then continue to avoid non-essential travel and socializing; observe social distancing to the extent possible; and follow a healthy lifestyle to strengthen our internal immunity.
  2. Social: Accept Covid19 as a normal flu and not attach any stigma to it. Reimagine social and religious ceremonies and pilgrimages.
  3. Business Increase the investment in technology to reorient our business processes. The idea should be to institutionalize the decentralized working and adopt more collaborative work practices.
  4. Finances: Cut leverage at both personal and business level, maintain a decent level of liquidity, enhance financial and social security for ourselves and co-workers and build an emergency corpus for future natural disaster and pandemics.
  5. Governance: Include Covid19 in the normal budget. Provide for building, maintaining and improving healthcare infrastructure, keep running awareness campaigns, invest in vaccine research and innovation, and be ready for annual seasonal spikes in cases.

(Go back)

Market outlook for this week

The daily and weekly technical outlook & trend for Nifty remains “Neutral” for this week; implying an even risk reward ratio. However, the monthly trend is now marginally negative, indicating that Nifty might hit an obstacle sometime in July. The momentum hs medium intensity; implying that chances of changes is the outlook and trend this week are moderate to low.

The outlook and trend for Bank Nifty however remain positive on daily, weekly and monthly timeframes; implying a favorable risk reward. The momentum in Bank Nifty is however high; implying a decent probability of change in the outlook and trend during the week. Any trade therefore must be with appropriate stop loss.

  • Nifty: The day traders may avoid trading in 15745-15815 nifty range, as in this range volatility may be high and stop losses on both sides may get hit. The long positions may be held with a stop loss of 15670 (on daily closing basis). Non positional short positions may be held with a stop loss of 16070 (on daily closing basis).
  • For Bank Nifty also day Trading may be avoided in 34970 – 35130 range. For all long position maintain a strict stop loss of 34580 (on closing basis). Non positional short positions may be held with a stop loss of 35495 (on closing basis).

(Go back )

Brokerage views

The macro data remained mixed this week. The current account balance came little worse than expected. BOP moderated sharply in 4QFY21 led by widening trade deficit and tepid capital flows. The core sector growth also moderated in May. Manufacturing PMI recorded a contraction after 11 month in June. However the belief in the cyclical recovery remained strong. There is a broad consensus that India is embarking on a long investment cycle led by both government’s infra spending and private capex on capacity addition and upgrades. Another area of broad area of consensus is a sustained upcycle in IT services, led by both pricing and volumes.

Whereas the popular trade is moving towards the recovery in the investment cycle, the debate over the sustainability of “reflation trade” that started a year ago. The indication by the US Fed that its inflation tolerance are getting tested, have led to sharp correction in global commodity prices.

FY21 has been one of the most challenging years for Indian economy. However, the year has drawn to a satisfying close insofar as the corporate earnings are concerned. Nifty EPS recorded a 15% growth over FY20, despite many challenges. FY22 earnings growth is expected to be much higher. The markets have however anticipated that and appear mostly pricing in the superior earnings growth. The margin for error appears very thin at this point in time.

Highlights of the brokerage calls

Peak coal

Institute for Energy Economics and Financial Analysis (IEEFA), expects the share of renewables in India’s energy generation to cross 50% by 2030 and coal generation to continue to decline after peaking in a few years. In a conference hosted by BOBCAP Research, IEEFA representatives emphasized that “Coal generation may be very close to the peak as (1) discoms will find coal power plants viable only at PLFs above 75% whereas the average utilisation is 60-65%, (2) ramp-up of coal generation plants is a slow process, (3) coal prices in India will increase as Coal India’s wage cost rises, and (4) Indian financial institutions will ultimately align policies with global institutions who are staying away from coal financing. However, this fossil fuel will continue to play a key role in balancing the grid till storage batteries become financially viable.”

It was also highlighted that intermittency of grid may not be a problem as “India is one of the few large countries with an integrated grid (something even the US doesn’t have). Last year, when the entire nation switched off lights for a few minutes, the grid was able to manage a ramp-up and ramp-down of 31GW (~17% of India’s peak load), indicating its robustness. While intermittency is a real risk, new grid technology has been able to handle renewables share of 30-50% in Germany and ~60% in South Australia.”

Reflation trade

Investors are reassessing their commitment to the reflation trade that has captivated Wall Street this year after a hawkish tilt by the US central bank inflicted losses on some fund managers.

The rationale for the reflation trade had centred around expectations that the accelerating US vaccination programme and removal of Covid-19 lockdown measures would usher in a period of high growth and inflation as business activity began to normalise.

The Fed’s insistence that it would also look past rapidly rising US consumer prices, which it deemed temporary, before adjusting its ultra-accommodative monetary policy further emboldened investors to take a stance against longer-dated Treasuries. Longer-term debt tends to suffer disproportionately from inflation since it erodes the value to investors of interest payments that are “fixed” for a period that spans many years.

Hedge funds piled in to the trade, betting that it was the next big win after they profited from rallying prices for US Treasuries last year. Caxton, one of the top-performing hedge funds in 2020, wrote in December that “the stage may well be set for a great reflation”. Some funds bet bond prices will fall, while others put on positions against the dollar.

Recent months have taken the shine off of this trade, with renewed buying in 10-year Treasuries sending yields falling well off of recent highs recorded in March 2021 despite larger than expected jumps in consumer prices. But it was June’s meeting of US central bankers and nascent signals that the Fed may not be as tolerant of higher inflation as previously expected under the new policy framework it unveiled last August that delivered the most significant blow to date. (Financial Times)

 

 …in the meantime the domestic HRC prices in traders market fell to a two-month low amid tepid domestic demand and constrained export opportunities. India’s export price also dropped 7% WoW to USD920/t. Russian FOB price dropped as producers vie for greater exports before the imposition of export tax from Aug-21.

European and Far East prices, however, remained firm. On the whole, market participants stay cautious ahead of seasonally weak Jul–Sep and the lack of clarity on a potential exports tax by Chinese authorities. (Edelweiss Securities)

Cyclicals

Many analysts and strategists have highlighted that a long capex cycle is beginning in India that may last for few years. To capture the opportunity, some new funds have been launched and some older ones have been repositioned. Some of the notable views could be “…we see stars beginning to align with multiple drivers for an investment cycle to start taking shape in India, after a decade. In our assessment, capital expenditure (capex) over the ensuing three years in core sectors ̶cement, metals, oil refining and power (esp. renewables) ̶should be about Rs. 5tn. This should not only be the highest in a decade but is also likely to be >2x the capex over the previous three years. Moreover, the government’s production linked incentives (PLI)–led capex should be ~Rs. 1.4tn in other sectors such as consumer durables, pharmaceuticals and automobiles. Household capex, esp. in residential property, and Govt. infrastructure spend should also see the best growth phase in a decade. It appears more decisively that Governments globally are betting on fiscal stimulants, especially in infrastructure, to recover from the COVID-19-led economic challenges, which means reflation is a key likely impact.

Disclaimer – A discussion on investment cycle invariably leads to 2003-2011 purple patch nostalgic comparison. We think the ensuing investment cycle, as it appears now, is still a far cry from what we saw then, when capacities expanded fivefold in multiple sectors including thermal power, which appears unlikely now.

Given the macro construct, our primary confidence driver remains consumption demand revival, which is the underlying bedrock for investment demand cycle to recover. This means the demand proxies for higher capacity utilisation as well as likely capex, viz. industrial consumables such as bearings, abrasives and forgings, should also see tailwinds. (SPARK Capital)

CARE Ratings expects “demand for cement to improve in a calibrated manner from July 2021 onwards. The second wave of Covid (Covid II) snapped the momentum gained in the overall demand during last quarter of FY21. Unlike its predecessor, Covid II proved to be a mixed bag. On one side, supply constraints are low, considering there has been no halt in operations for the cement manufacturing companies; however, on the other side, the rural cement demand is likely to be weaker with higher rate of infections therein. Double-digit cement volume growth seems unlikely as of now for FY22 considering the uncertainty with respect to the constantly evolving covid situation in the country including the likelihood of third Covid wave later during the current fiscal year. However, the profitability for cement players is expected to remain healthy during FY22 supported by expected higher volumes and continuing pricing power enjoyed by cement companies which is likely to offset the cost pressures considerably. (CARE Ratings)

Kotak Securities’s Sanjeev Prasad feels that “The ingredients of a multi-year capex cycle — much needed for the Indian economy after years of consumption-driven growth—are in place”. The cycle is likely to be led by household capex as people look to upgrade homes, followed by private sector investment which could get a boost from recent policy changes. He told BloombergQuint, “I’m hopeful about household capex, which is essentially money going into residential real estate,” Prasad told BloombergQuint in an interview. “If you look at household physical savings rate, that has come off sharply over the the last ten years or so. It used to be 15-16% of GDP in 2012-13, it has come down to 11-12% of GDP currently.”

“There are a lot of good things the government has done over the last few years—corporate tax cut, labour reforms and PLI schemes,” Prasad said. “Hopefully all that results in more private sector capex.” (BloombergQuint)

Cement companies under our coverage showcased good resilience in FY21 despite Covid-related challenges, and reported operating profit growth of 20% YoY driven by strong profitability (Ebitda/t up 20% YoY). Akin to last year, FY22 too is starting on a weak note, with volumes likely to decline QoQ by 25-30% in 1Q; however, this should be offset by the price increase during the quarter. Our interaction with dealers and companies suggests strong underlying demand momentum and, thus, a likely recovery post the monsoon. Nevertheless, we moderate our FY22 volume growth assumption, from 13% YoY to 10.5% YoY; however, after incorporating the 1Q price hikes, our Ebitda estimate is up by 2-3% for FY22-23ii. (IIFL Securities)

With many states having commenced a phased unlocking, the early high frequency indicators confirm a sequential improvement in June 2021, although the trend relative to June 2020 is mixed. Active Covid-19 cases have declined, but remain considerable at 0.6 million, and are concentrated in just a few states such as Maharashtra, Kerala, Karnataka, Tamil Nadu and Andhra Pradesh. Encouragingly, the last week has seen a sharp ramp up in the administration of Covid-19 vaccines to an average of 6 million per day during June 21-27, 2021, from an average of 3.2 million per day in the previous week. If the pace of vaccination is maintained at 6 million per day in Q2 FY2021 and subsequently increased to 8 million from Q3 FY2022 onwards, we expect all adults to receive both doses of the vaccine by early February 2022. If the expected ramp-up doesn’t materialise in Q3 FY2022, and on average 6 million vaccine doses continue to be administered per day, we estimate India’s entire adult population to be fully vaccinated by mid-March 2022. Recently, the Government of India (GoI) has unveiled a new set of relief measures with a total value of Rs. 6.3 trillion or 2.8% of India’s expected nominal GDP for FY2022; ICRA estimates the fresh fiscal outlay of the new announcements at Rs. 0.5-0.7 trillion or 0.2-0.3% of GDP in FY2022. Overall, while the unlocking and vaccine ramp up have brightened the prospects for the pace of the economic revival, uncertainty persists given the emergence of the Delta Plus variant of Covid-19. We maintain our expectation that Indian GDP will expand by 8.5% in FY2022 (at constant 2011-12 prices), with an upside of 9.5% predicated on an accelerated vaccine coverage. (ICRA) in the meantime the Eight core infrastructure industries saw output fall 3.7% in the month in May. This comparison reveals that core sector output in May 2021 is 93.9% of February 2020. The core sector output had surpassed and/or came very closed to the February 2020 core sector output level during December 2020-March 2021 but slipped thereafter. This happened due to the regional/partial lockdown imposed in the different parts of the country due to the second wave of Covid infections.

and Manufacturing PMI stood at 48.1 in June compared with 50.8 in May, according to its media statement. A reading above 50 indicates economic expansion. (BloombergQuint)

The Google mobility data (avg of retail/recreation, workplace and transit stations) suggests the global economy is operating only 12% below normal mobility levels—the lowest mobility gap since this pandemic began. Median global mobility has improved from 60% of pre-pandemic levels at the start of the year to 88% in the latest data. EM and DM mobility now sits at roughly equal levels (88-89%), but the improvement this quarter is strongly skewed to DM (+19pp vs +9pp in EM).

Most strikingly, perhaps, mobility in the Eurozone (87%) now exceeds that in the US (85%), despite on paper still having more government restrictions in place (nearly 4/10 on our restrictiveness index vs 2/10 for the US—see Fig 1 below). The mobility ‘delta’ for the Eurozone this quarter (+13pp) is noticeably stronger than in the US (+4pp) but both pale in comparison with the UK (+22pp) where we now expect nearly 20% annualized growth. Note also the significant slowdown in Asia (e.g. Figure 12 & 15), the only region with broad-based mobility deterioration in Q2. (UBS Securities)

IT Services

The above expectation result from IT services company Accenture strengthened the confidence in continuing momentum for Indian IT sector.

“ACN indicated that it expects the demand momentum to sustain in the coming quarters as clients accelerate their transformation journey led by cloud. ACN indicated that growth differentials, which were 2x between leaders and laggards of digital transformation, have increased to 5x post the COVID-19 pandemic and that is driving demand. Key areas of demand: 1) Cloud – which continues to grow by strong double-digit y-y; 2) Security – given ACN’s capabilities across the entire spectrum from advisory to cyber defense; 3) digital platforms and products – Intelligent platform and Industry X grew double digits in 3Q and 4) customer experience – CAN Interactive clocked double-digit growth y-y.”

On the caution side, Accenture highlighted that “While demand trends are positive, ACN indicated supply-side pressures due to rising demand for talent and no benefit from lower travel costs, starting 3Q. This could increase margin pressures for Tier-1 IT in FY22F. (Nomura Securities)

Having shifted their business mix aggressively towards digital, Indian IT companies are positioned well to cash in as spending on technology in the next 10 years is expected to be more than in the previous two decades, according to Morgan Stanley.

Covid-19 has accelerated tech migration, as reflected in the higher shift to public cloud in 2020 versus the previous two years, Morgan Stanley said in a note. It sees margin tailwinds from a distributed delivery model, providing more headroom to make investments and drive market share gains in the next three years. The sector’s order booking remained strong even during the pandemic, leaving room for “positive surprises on revenue growth over the coming quarters”, the brokerage said in a research note. (BloombergQuint)

FY22 earnings outlook

At current levels of 15,721 the Nifty-50 is trading at 22.1x on FY22E and 19.4x on FY23E. From now till end of FY22, we expect modest returns from Indian market considering strong economic recovery and gradual increase in global and domestic bond yields. Equity markets will have to adjust to the reality of higher interest rates as central banks start to execute their ‘exit’ plans for their ultra-loose monetary policies over the next few months.

Off late, sectors such as entertainment, aviation, malls and hospitality & leisure have remained in focus just because of talks around loosening of restrictions in some states. Investors should maintain a safe distance from stocks rising on irrational exuberance. It would be prudent for investors to ride the bull wave in fundamental resilient companies only and avoid temptation in weak fast moving stocks. Defensives sectors like FMCG, Pharmaceuticals and IT Sector may act as a protection or safety net as their valuations are already very rich.

As most sectors and pockets have seen rally on a rotation basis there are only handful of stocks in each sector where there is scope of making money. One can look at select stocks from each sector where earnings growth is likely to be high and valuations are reasonable. It is going to be a stock pickers market from here on.

By the end of FY22 investors would start discounting FY23 earnings. Considering 300-400 bps premium of equity PE over bond PE we can justify Fwd. PE of 19-20x for Nifty-50. On FY23E EPS of Rs.813 we can expect Nifty-50 to end FY22 somewhere ~16,500 (+/- 500 points). Similar level of Sensex by end of FY22 could be ~55,000 (+/- 1700 points). It will be a good buy on dips market as earnings growth is likely to remain very high FY21-23E. Investors will need to have a 2-3 year time horizon as one year returns may not be lucrative, considering the sharp run-up already seen in the last one year. (Kotak Securities)

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Author: Midas Finserve

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