We saw a spate of corporate results this week and these, together with the management commentary, should give us a worm’s eye view about how earnings are doing. To be sure, we always knew that June quarter earnings would be putrid, given that the entire country was in the grip of a lockdown for most of the period, but it should give us an idea of just how deep is the hole that companies have to climb out of. Plus, of course, it makes a nice change from our usual moaning about the economy.
In fact, the results have been rather better than our worst fears, with company managements being able to find ways to minimise the pain -- for shareholders, if not for employees. In sectors such as cement, volumes in some regions are reaching pre-Covid levels, making us wax lyrical about their resilience. Retail volumes are robust and the demand is skewed towards rural markets. Unfortunately, all this is already priced in for some stocks, which is why valuations are frothy.
Just in case you think the cement story also signals a turnaround in other stocks dependent on investment demand, think again. Delays in project execution and the impact on the industry-wide payment cycle could cause stress and lead to a slow recovery in demand. Talking about capital goods, did you know that agriculture is becoming more capital-intensive, thanks to the absence of migrant labour?
Some metals stocks, however, took advantage of lower raw material costs and kept a tight leash on other expenses, delivering results above Street expectations. In the steel sector, though, everything depends on China, whose global market share was a massive 62 percent in June.
But take a look at the mother of all cyclical sectors -- banking. Practically every research note and analyst has been worried about the fragility of the Indian banking system and we had a reminder of that this week from the RBI’s Financial Stability Report. A welcome surprise though was the lower moratorium levels in banks, particularly in a small finance bank. Of course, even for the larger banks, the real picture will emerge only after the end of the moratorium period in August. Kotak Bank has not extended the moratorium to borrowers whose long-term repayment capability is severely impaired -- instead, it has prudently recognised those accounts as non-performing. For some banks, such as IndusInd, their increased provision cover is comforting. This applies to HDFC too, which thankfully has a very healthy balance sheet in a troubled sector. And since we’re talking about the financial sector, here’s what bankers think about the prospects of the economic recovery.
What about firms catering to consumer demand? This is a story that has recently received a boost from the good monsoons, but there’s now some uncertainty on that front, too. Consumption demand has been holding up the Indian economy single-handedly, but it was tiring even before the pandemic. Companies focused on food and beverages such as Nestle have, however, sailed through the crisis. Agro-chemical companies benefited in surprising ways -- for example, following the scarcity of labour because of the nation-wide lockdown, many farmers had opted for direct sowing in place of transplantation, leading to a higher use of agrochemicals. Moreover, reduced manual weeding is likely to boost the use of chemicals in the coming weeks.
For some FMCG companies such as ITC, it may be time for a re-rating, in others, it’s only sky-high valuations that are reluctantly holding back analysts itching to give a ‘Buy’ recommendation. Marico benefited from lower raw material prices, others such as Colgate Palmolive India cut back their advertising spends and seized the new opportunity in hand sanitizers.
Next, consider discretionary consumption and autos. Those with a clear focus on the rural markets, such as Escorts, have done well. For TVS Motors, as the country-wide lockdown eased, the number of operational auto retail outlets went up, reaching 85-90 percent in the beginning of July, but that proportion has now come down to 75-80 per cent as business activities are being hampered by local lockdowns.
The market leader, of course, is well poised to grab the extra demand arising out of the need for personal transport. RC Bhargava, Maruti chairman, says in this interview: ‘Right now, supply— in terms of the ability to manufacture more — is a bigger constraint than demand and this may remain true for the next two months. After that, we will have to watch.’ In this environment, will the new chief at JLR be able to steer the company out of its existential crisis?
And then, of course, we had the RIL results. I bring that up because it is aiming to become a platform company and platform companies such as Amazon and Facebook have delivered fantastic results during the lockdown. Indeed, in the US markets, Tech leadership is near the highest since the dot-com bubble in 2000.
The big question, though, is how much of the bounce we have seen in consumer demand till now is due to pent-up demand, kept in abeyance during the lockdowns? The virus is reappearing in many countries and lockdowns are being re-imposed in some cities and regions. This will further delay the recovery.
In India, new cases are going up every day. An Oxford Economics report, titled ‘India: a re-opening gone wrong’ says, ‘In our baseline, we expect GDP growth to lose momentum from late Q3 on, once the push from the initial reopening fades and, likely compounded by the ongoing pandemic and inadequate policy support, legacy economic headwinds re-assert themselves.’
To be sure, the markets have been resilient. But here’s how skewed the Indian market is: The top 20 companies based on their market capitalisation now account for more than half of total market value.