September 2020 / Q2 FY21

01Is This Bull Run Sustainable Or A Bubble?

Nifty grew almost 26% during Q1-FY21 despite the -23.9% GDP print, and is still 9.5% lower than January levels at the time of writing. As we noted in our June 2020 / Q1 FY21 newsletter, the headline index level looks expensive. Yet the underlying narrative has actually hardened over the last quarter, on three legs: green shoots in the real economy, vaccine visibility, and SEBI rule changes that channel fresh flows into small/mid caps.

1AGreen Shoots Find More Support As The Economy Opens Up

The most-watched real-economy indicator – GST collections – has staged a near-full recovery to pre-Covid levels. After collapsing in Q1-21, the Q2-21 print is back within striking distance of Q2-20 even as restrictions persist in pockets.

Manufacturing PMI grew at the fastest pace in 8 years – from 52 in August to 56.8 in September. The Nomura India Business Index picked up to 82.1 for the week ending Oct 4, against 81.6 the previous week. Both manufacturing and services PMIs are now back at, or above, March 2020 levels.

Power generation is over 15% higher in 2020 vs 2019, with the seven-day rolling average finishing at 3,756 million units on Oct 4 (vs 3,235 million units in 2019). On the same yardstick, Indian Railways freight loading was +23.48% YoY and freight earnings +23.49% YoY for the seven days ended October 3 – an unusually clean signal of industrial activity.

Auto sales in September 2020 registered a strong YoY pickup across nearly the entire OEM stack. Tata Motors and Kia Motors both more than doubled YoY; Maruti Suzuki and Hyundai posted double-digit gains. Only MG Motor printed a marginal decline.

1BVisibility Of A Vaccine Getting Stronger

Multiple vaccine candidates are now in late-stage trials globally and in India, with rolling-emergency-use frameworks being tabled. A vaccine, when it arrives, removes the single biggest tail risk to the recovery and resets the discount rate at which the market values future earnings.

1CSEBI Making Way For Small/Mid Cap Investing

SEBI has reset the multi-cap mutual-fund allocation rules in a way that is structurally bullish for small and mid caps. Multi-cap fund AUM stood at ~INR 1.46 lakh crore as of 31 August, with a deadline of February 2021 to re-align portfolios.

02The Chasm Between The Economy And The Stock Market – Really?

2AMarkets Are Forward Looking

India is far from alone in printing a deep Q1-21 GDP contraction; its -23.9% print sits in a global cohort that has every major developed and emerging economy in negative territory, with China being the lone exception.

Forward-looking estimates from the rating agencies see FY21 contraction in the -9% to -12% range, followed by a sharp ~10–11% rebound in FY22 – which is the recovery profile that markets are already starting to price in.

2BA Languishing Economy Need Not Mean Languishing Listed Companies

The most under-appreciated insight of this cycle is that only 26% of listed-company earnings are dependent on the broader Indian economy. The rest is driven by share gains from the informal sector, share gains from competitors, and exports. The unorganised-to-organised shift alone explains 57% of the growth profile of the listed universe.

2CDifferent Segments Of GDP Are Showing A Strong Come-Back

India's GDP is composed of Services 55%, Industry 30%, Agriculture 15%. Within each, the recovery is uneven but visible: Agriculture is already growing, Industry is back at 70-90% of pre-Covid levels, and most parts of Services are unlocking on a state-by-state basis.

2DBreak-Up Of The Q1-21 Contraction

The headline -23.9% number masks an enormous internal dispersion. Construction (-50.3%) and Manufacturing (-39.3%) dragged hardest, while Agriculture actually grew. The Q2-21 developments column tells the recovery story segment by segment.

03Is This The Right Time To Build A Portfolio? Indeed Yes – Time To Look For Micros, Not Macros

3ANo Time To Generalise At The Macro Level – Dig Deeper At Specifics

Persistent low-interest regimes globally are driving liquidity into equity as a structural matter. People are returning to work; the "new normal" is adapting; the central government is pushing states to unlock. The macro will continue to be lumpy, but the bottom-up dispersion is enormous and the right businesses are already gaining share.

3BIntermittent Irritants Will Continue – Have A Buying List Ready And Buy On Dips

Conviction does not mean denial. Four near-term irritants sit on the watch-list:

3COur Approach

We are building a buying list across auto ancillary, the power industry, infrastructure, and packaging. We are patiently waiting for market dips to build the portfolio, not chasing the index higher. The discipline of the cycle is to be ready – with both the names and the cash – when the dips arrive.

04In Closing

Please feel free to reach out to us at [email protected] / [email protected] with your comments, suggestions, and queries. Best wishes for the upcoming festival season. Stay safe. Stay healthy.

Sources

01

Equitree Capital internal performance records, quarter ended 30th September 2020. Sensex +~6% during the quarter; Equitree portfolio +~15% during the quarter and +~44% from the March 2020 lows through the end of the quarter. Individual portfolio performance may differ.

02

NSE; reconstructed for native rendering. Nifty 50 monthly close levels and India VIX monthly readings, January through September/October 2020.

03

Livemint – GST Collections, Q2-21 vs Q1-21 vs Q2-20 in INR bn (₹2,694 bn / ₹1,852 bn / ₹2,985 bn).

04

Company Research – PMI Manufacturing and PMI Services index readings, March–September 2020. Includes the Nomura India Business Index 82.1 reading for the week ending Oct 4 (vs 81.6 prior) and the Manufacturing PMI move from 52 in August to 56.8 in September.

05

Business Standard – Power Generation seven-day rolling average from National Load Despatch Centre (Mar 7 – Oct 4); Indian Railways freight loading +23.48% YoY and freight earnings +23.49% YoY for the seven days ended October 3.

06

The Economic Times – Auto sales by OEM for September 2020 vs September 2019 (Maruti Suzuki, Hyundai, Tata Motors, Kia Motors, M&M, Honda Cars, Toyota, MG Motor).

07

SEBI multi-cap fund allocation circular – New Rules vs Old Scenario; multi-cap mutual-fund AUM ~INR 1.46 lakh crore as of 31 August 2020; realignment deadline February 2021.

08

Country statistical agencies, compiled by Equitree Capital – Q1-21 GDP YoY for India, UK, Malaysia, Euro Zone, USA, Russia, Indonesia, South Korea, Brazil, China.

09

Moody's, S&P Global, Fitch, India Ratings & Research – published GDP estimates for India FY21 and FY22.

10

CNBC TV18 – breakdown of growth drivers for listed companies (informal sector 57%, competitors 3%, global economies 14%, Indian economy 26%).

11

MOSPI / Government of India – GDP composition by sector (Services 55%, Industry 30%, Agriculture 15%).

12

MOSPI Q1-FY21 GDP release plus press reporting (Business Standard, ET, Livemint) for the Q2-21 segment-by-segment developments column. Includes Tata Steel 100% utilisation in August, NHAI 744 km awarded in April–August 2020 vs 676 km in FY20, food-delivery sales at 85% of pre-Covid levels in September, USD 312,800 median new-home price, defence policy target of ₹1.75 trillion turnover and ₹35,000 crore exports by 2025.