Mr Binod Modi, Head Strategy at Reliance Securities
Fear of fresh rise in COVID-19 cases after discovery of new variants in Hong Kong and South Africa, which are considered to be faster transmissible has dented sentiments across the globe. Domestic benchmark Nifty witnessed corrected over 2% in a single day today mainly on weak global cues and heavy sell-off across the sectors. Barring Pharma, most sectoral indices contracted 1.5% to 5%, while investors wealth was eroded by over Rs5.5 trillion in a single day today. Midcap and smallcap indices fell mostly in tandem with large caps today, while volatility index surged around 20%. For the week, benchmark Nifty corrected for second consecutive week by over 3.5% and India marketcap fell over Rs9 trillion during the week. CIPLA, Dr Reddy's, Divi's Lab and TCS were among top Nifty gainers, while JSW Steel, Hindalco, IndusInd Bank and BPLC were laggards.
In addition to recent rise in COVID-19 cases in various parts of European and Asian countries and resultants lockdowns, surge in dollar index weighed on investors sentiments. However, on the positive side high frequency key economic indicators for Oct'21 remained upbeat and continues to reflect sustained economic activities and sustainable earnings growth. Further, government's effort to calm down high commodity prices by cutting excise duties in petrol and diesel augurs well, which along with CPI remaining below RBI's reference range will also aid RBI to keep interest rate at current range to support ongoing recovery. Notably, domestic markets witnessed high volatility in recent weeks as no positive surprise from 2QFY22 earnings especially due to higher input costs have weighed on investors' sentiments. Notably, high input costs have adversely impacted margins and profitability of consumer and manufacturing companies despite steady volume and sales growth. However, despite that Nifty recorded 11% YoY and 30% YoY growth in revenue and profit, respectively during 2QFY22. In our view, market may consolidate at these levels with possible reversal 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. This should also get support from better than expected government's fiscal deficit in 1HFY22, which stood just 35% of budgetary estimate. Further, Moody's 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. Steady rise in disbursal of banks and NBFCs in 2QFY22 and sharp rise in Securitization volumes in 1HFY22 vindicate growth momentum of the economy. 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. 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. 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.