COVID rearing its head up- April 2021

Markets remained buoyant as NIFTY & SENSEX were up 71% & 68% in FY 21. This move has largely been driven by liquidity due to strong FII inflows over last few months. Although we are currently witnessing the 2nd wave of COVID with a sharp spurt in cases, mortality rates remain low, partly due to vaccinations; markets have managed to hold on as liquidity remains strong.

FII have been buying heavily in Indian equities over the last year. In H2FY21, FIIs have been net buyers to the tune of Rs.1.80 lakh cr. In comparison, they have been net sellers to the tune of Rs.3,034 cr till 15th April 2021. This has partly been due to increasing COVID numbers & profit booking to an extent.

As per AMFI, equity mutual funds saw net inflows of Rs 9,115 cr in March 2021 after net outflows for last 8 months. Among equity funds, sectoral funds and ELSS got inflows of Rs 2,009 cr and Rs 1,552 cr, respectively. Investors reinforced their faith in SIPs, as contribution through SIP went up to Rs 9,182 cr in March compared to Rs 7,528 cr in February 2021. Bond funds saw net outflows of Rs 52,528 cr. The redemptions are attributed to the end of quarter fund requirements of corporates. Liquid funds and low duration funds saw the maximum redemptions – Rs 19,383 cr and Rs 15,847 cr, respectively. Total AUM for the mutual fund industry stood at Rs 32.17 lakh cr as on 31st March 2021 as compared to Rs 32.29 lakh cr as on 28th February 2021.

Gold and silver prices have been declining in Indian markets amid a hardening of US bond yields. Gold though has rebounded marginally from last month lows of Rs.44,000/10 gms to around Rs.46000/10 gms currently its down Rs,10,000/10 gms from last year  highs. Falling gold prices have attracted investors to gold ETFs. These schemes saw net investments of Rs 662 cr in March as compared to Rs 491 cr in previous month. In FY21, gold exchange traded funds (ETFs) saw record net inflows worth Rs.6,918 cr, the highest ever in a year up 328% yoy from Rs1,613 cr in FY20.

The price of Brent crude has fallen under $63 per barrel from a high of $70 per barrel in early March on the back of growing fears about a fall in demand due to new travel restrictions to combat resurgence in Covid-19 infections and increasing crude oil supply. OPEC+ has announced a phased withdrawal of production cuts which would see total crude oil production by the group of countries rise by 1.1 mn barrels/day by July. Recent US data has also indicated that gasoline inventories are rising faster than the fall in crude oil inventories raising concerns of waning demand for petroleum products. Previously, hopes of increasing demand due to lower restrictions and accelerated vaccine administration programs around the world had pushed crude oil prices up from about $40 in October to $70 in early March.

There were no major surprises as the Reserve Bank of India (RBI) on 7th April maintained status quo for the fifth time in a row on policy rate. RBI Governor Shaktikanta Das-headed MPC, has left the repo unchanged at 4%. The reverse repo rate stands at 3.35%. The RBI has a new inflation worry as the rupee depreciation against the US dollar has increased the risk of imported inflation via crude oil and commodity prices. The second COVID wave is also expected to upset the RBI’s inflation calculation as local lockdowns impact supply chain and logistics.

Consumer Price Index inflation (CPI) for the month of March came in at 5.52%, rising from February’s 5.03%. The food price inflation rose to 4.94% in March, as compared to 3.87% in February. CPI inflation of fuel and light moved up to 4.50% in March 2021. The current retail inflation is already hovering closer to the RBI medium term inflation target (of 4+/-2%) uppermost band of 6%.

Wholesale prices based inflation (WPI) shot up to an eight year high of 7.39% in March, primarily on higher prices of crude oil and aided by a low base. The low base resulted in crude, petroleum and natural gas inflation of 32%, while other fuel and power inflation was 10.25%.It should be noted that crude, petroleum and natural gas inflation was in the negative zone up until February. Manufactured goods inflation was 7.34%, a clear indication that pricing power among producers has strengthened notwithstanding the pandemic-induced slack in the economy. The depreciation in the INR will push up the landed cost of imports, adding to the inflationary pressures for the WPI going forward.

Contraction in industrial output (IIP) widened to 3.6% y-o-y in February from 1.6% in the previous month. Intermediate goods, primary goods and infrastructure goods — the segments that have performed better than the rest in recent months — have contracted by 5.6%, 5.1% and 4.7%, respectively. In contrast, a contraction in capital goods and consumer non-durables narrowed to -4.2% and -3.8%, respectively, in February from -9% and -5.4% in the previous month. Favorable base effect from March will push up the IIP growth, but any worthwhile industrial recovery is still away.

The IHS Markit Purchasing Managers’ Index (PMI) for manufacturing sector declined to a seven-month low of 55.4 last month from February’s 57.5, but remained above the 50-level separating growth from contraction for an eighth straight month. Survey participants indicated that demand growth was constrained by the escalation of the COVID-19 pandemic, while the rise in input buying was curtailed by an intensification of cost pressures. India’s PMI for services fell to 54.6 in March from 55.3 in February, registering a slower but still marked pace of expansion. Survey participants reported a sharp increase in input costs, the second-fastest since February 2013. The fall in both the headline services and manufacturing PMIs depressed the composite PMI from February’s four-month high of 57.3 to 56.0.

Retail passenger vehicle sales in the country grew 28.39% to over 2.79 lakh units in March 2021 as compared to the year-ago month which saw lower sales due to the nationwide lockdown, according to data released by the Federation of Automobile Dealers Associations (FADA). However, despite the lower base, there was a 35.26% decline in two-wheelers sales to about 11.95 lakh units, nearly 51% decline in three-wheeler sales to 38,034 units and a 42% decline in the sales of commercial vehicles to 67,372 units. Meanwhile, tractor sales continued to grow to 69,082 units last month, up 29.21%. The global shortage of wafers, which is an input for semiconductor, kept PV waiting periods as high as seven months.

The gross GST revenue collected in March 2021 is the highest since introduction of GST at Rs.1,23,902 cr of which CGST is Rs. 22,973 cr, SGST is Rs. 29,329 cr, IGST is Rs.62,842 cr (including Rs. 31,097 cr collected on import of goods) and cess is Rs. 8,757 cr (including Rs.935 cr collected on import of goods).In line with the trend of recovery in the GST revenues over past five months, the revenues for March 2021 is 27% higher y-o-y. Going ahead we need to monitor if GST collections manage to maintain the current trend.

24th March marks a year of India’s nationwide lockdown. The country went in for the strict Covid-19 lockdown when just around 525 positive infections were detected. A year on, since the country went into a lockdown, it is facing a second wave of the COVID pandemic. The rapidly rising coronavirus numbers in the last month has brought back the spectre of a lockdown. Limited lockdowns have already been imposed in some cities. With daily cases above 2 lakhs/day, how fast the current situation plateaus out needs to be seen.

We are in the middle of the assembly elections, while polling is over in Tamil Nadu, Assam, Pondicherry and Kerala it continues in West Bengal. Counting for all seats will be done on 2nd May. While BJP is already in power in Assam, they would be looking to make significant inroads in the rest of the states. Markets will keep a close watch on results in West Bengal, among all the states.

As the frontline indexes have been range bound over the last month between 15,200 and 14300, we feel we have to be a bit selective in stock picking. Some sectors like PSUs, metals & mining construction etc are still significantly lower than their all-time highs. Similarly with increasing COVID numbers and vaccinations we will see renewed focus on pharma & IT sectors. We need to be a bit cautious in the short term as cases rise in the 2nd wave. This could also be a good buying opportunity if there is a marginal correction in markets.

GST collections have been strong over the last five months though negative IIP remain a concern. We have to keep in mind that we had complete lockdown last year from end March. Thus yoy economic numbers will look extremely good on a low base, over next few months. Higher than expected inflation numbers coupled with a sharply depreciating INR remain a concern. We strongly advise investors to continue their SIPs in equity funds & if possible increase the amount. This is a very good buy on dips market & focus should be on stock picking. I think we are at the beginning of another bull run & could see positive movements over the next couple of years.

Engineers India Ltd – Deep Value

Indian Railway and Tourism Corporation Limited – Connecting online

Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 13 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata.

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