Post Market views - Oct 25, 2021 - Mr. Binod Modi, Head Strategy at Reliance Securities
2021-10-25 21:23:19 (Time Zone: IST)
Domestic equities traded in a rangebound today amid mixed global cues and high volatility with benchmark Nifty oscillating between marginal gains and losses. Barring financials and metals, most key sectoral indices witnessed continued to see profit booking. Notably, strong September quarter performance reported by ICICI Bank with visible improvement in asset quality and RoA aided ICICI Bank to see sharp uptick today. Midcap and Smallcap stocks continued to see heavier profit booking, while volatility index soared modestly today. ICICI Bank, Axis Bank, ONGC and Hindalco were among top Nifty gainers, while BPCL, Bajaj Auto, SBI Life and Bajaj Finserv were laggards.
Notably, high input costs have adversely impacted margins and profitability of select consumer and manufacturing companies despite steady volume and sales growth. This essentially raises concerns about sustainability of earnings rebound in subsequent quarters, which has weighed on sentiments. However, despite that overall performance so far has been good with sharp growth in revenue aiding double digit growth in earnings. In our view, market may remain volatile with downward bias in the near term and investors will track pricing power of the industries. Notably, MPC meeting minutes pointed towards uneven growth as 55% of 404 industries in India are still operating below FY20 levels. This essentially indicates that interest rate scenario is unlikely to reverse in the near to medium terms and should continue to support earnings despite elevated cost pressure. Further, after India's sovereign rating upgrade by Moody's Investors Services last month, it has recently upgraded rating for banking industry from negative to stable in the backdrop of likely pick up in credit growth (10-13% annually) and possible contraction in credit cost, which should offer more comfort to investors. Further, steady rise in disbursal of banks and NBFCs in 2QFY22 (as shown in their provisional numbers reported to exchanges) and sharp rise in Securitization volumes in 1HFY22 vindicate growth momentum of the economy. Additionally, high frequency key economic indicators in September in the form of GST collection, manufacturing PMI, import-export data, railway freight and e-way bills continued to reflect improvement in economic activities, which bode well for corporate earnings. Notably, a sustained recovery in key economic indicators and faster vaccination ramp-up with least possibility of third wave of COVID-19 hitting in a bigger way bolstered investors' confidence. Tax collection data for 1HFY21 was also quite impressive, which virtually crossed pre-pandemic FY20 numbers with a wide margin. However, sharp rise in USA bond yield, likelihood of possible reversal of soft monetary policy of Federal Reserve and elevated energy prices are likely to remain key concerns for global equities. In our view, India is at the beginning of capex revival phase and therefore corporate earnings recovery looks sustainable and premium valuations might sustain. Additionally, government's focus to improve credit growth through credit outreach programme and continued traction in PLI schemes augur well for domestic economy. In our view, festive demand, recovery in rural demand, COVID-19 positivity rates, vaccination ramp-up and September quarter earnings will be in focus in the near term. Further higher government's capex and revival in industrials' capex should continue to aid economic recovery in the medium to long term. However, liquidity driven market may take a backseat in 2022 and investors must start focusing on quality aspect of companies, in our view.