Covid has been a blessing in disguise for the Indian stock markets where increased consumption has boosted stocks in sectors FMCG to Paints, Consumer durables to Cement and Banks to Real estate. Improved demand for new segments like personal hygiene and immunity foods have created new revenue streams. Hospitals have generated additional revenues from vaccinations while Hotels, Travel & Leisure stocks have seen good spikes post the pandemic on pent-up demand. Domestic travel has also seen a bump up on long Visa queues running into yeas for foreign travel. Autos is the only sector which lagged despite good 4-wheelers demand on semiconductor supply issues.
The chief factors that played out during the Covid and post-Covidthat led to the above scenarios were
1) Digitization and formalization of the economy
2) Increased incomes in certain sectors like IT and higher household savings due to mobility restrictions in the Covid period, leading to revenge consumption after the restrictions were lifted
3) Work-from-home factor leading to higher demand for household consumer durables, home improvement and entertainment
4) China + 1 strategy of global enterprises leading to higher demand for Indian made products particularly for Chemicals, some manufactured goods like mobiles and Steel
Markets have recognized the above factors and duly rewarded the investor who held on in the volatile times by giving some 140% returns in 33 months period (March 2020 till Dec 2022). However, thingsrapidly changed as the quarter ending Dec 2022 results started pouring out and management commentaries turned more cautious on the future outlook. Volume growth has dried up and it emerged that the entire revenue growth witnessed was due to price hikes taken to pass on input price pressures. Global inflation has remained sticky and increased cost of funding by central banks to tame the samehas tightened the liquidity tap which till recently has flown freely into emerging market assets.
Below is the sector-wise outlook based on management commentary post the 3Q23 results
• Autos: Though 4-wheeler demand remains strong on pent-up demand and CVs saw some push on Govt spending, 2-wheelers continue to languish as Covid hit middle class is yet to recover. Agri demand hurt on extended rains in some parts and premature heat conditions in the other. Reduced purchasing power due to increased finance costs has made companies like Maruti cautious about demand outlook
• Banking: Credit growth seems to be holding up in double digits mostly due to working capital financing to fund higher input costs for corporates. Margins and profitability might suffer on fight for deposits and lower investments income on rising yields
• Cement: Higher housing demand post Covid led to companies adding additional capacities. This led to over supplies and pricing pressures as demand recovery is not as robust as companies expected. Luxury real estate doing well but affordable housing and rural demand fell post Covid. Government spending is the only hope but unlikely to push the demand ahead of current capacities which were lined up
• Chemicals: China + 1 strategy led to higher demand and the fears of global slowdown now leading to valuation correction in most of the stocks
• FMCG: Rural demand is hit by inflation and urban demand is seeing some downtrading as loan costs rise
• Consumer Durables: Stocks saw valuation spikes as Covid drove in-home demand for goods like ACs, Laptops etc; The high base is now leading to lower growth and unlikely to recover to previous levels
• IT: Global demand might slowdown due to problems in BFSI sector in US and Europe. Recessionary fears across the globe started to impact the discretionary IT spending of corporates. This has led most of the Indian IT stocks to correct to their mean valuation levels. Lower hiring levels by them signal that growth might taper off
• Infrastructure: The sector is the lone hope and rests on improved Govt spending on back of higher budgetary allocations. Margins might still suffer on higher commodity costs like steel
• Metals: Prices have corrected 20-40% from the peaks seen in 2022 and Indian meal companies saw similar stock price erosions. Chinese demand seem uncertain and higher interest costs doesn’t bode well for the sector
• Pharma: Stocks saw steep corrections as Covid demand is off. Pricing pressures return in US
Valuation of any company by conventional DCF method is directly proportional to the growth and inversely proportional to the cost of capital. In the currenteconomic scenario where the cost of capital is increasing and growth is slowing, the double impact is bound to take the valuations lower.
Post the recent correction, India Nifty valuations on 1year forward basis have corrected to the pre-covid levels of 18x from 23x in Dec 2022. But the valuation premium to the MSCI Emerging markets index have increased from c.65% before Covid to >100% today. The de-coupling theme seems busted as Indian markets now underperforming the global peers due to local factors like fears of failed monsoon and loss in confidence due to issues like the Adani saga. While India is expected to continue to trade at premium vs. other EM peers, normalization of this premium is most likely and might take our indices further lower.
Disclaimer: The views expressed are the author’s own and APAC News Network is not responsible for any of them.
