Markets remained buoyant as NIFTY & SENSEX hit new highs with NIFTY above 16,500 & SENSEX above 55,000 for the first time ever. The markets have hardly been impacted by the 2nd wave of COVID. With Q1 of last year being under lockdown, Q1 numbers this year are looking very good y-o-y. But going ahead, with markets at elevated levels we feel corporate earnings need to catch up over the next few quarters.
FII have been sellers over the last few months but insignificant compare to the buying which took place between December 2020 and March 2021. FIIs have been net sellers to the tune of Rs.23193 cr in July 2021. This has partly been due to profit booking as markets remained buoyant. Till 13th August in the current month FIIs have been net buyers to the tune of Rs.3495 cr.
As per AMFI, equity mutual funds made a net inflow of Rs.22,583 cr in July 2021 (Rs.8,900 cr ex-NFOs) as compared to Rs.5,988 cr inflows in June. NFOs during July collected Rs.13,700 cr. According to the data, at Rs.35.31 lakh cr, the net AUMs for the Indian Mutual Fund Industry breached Rs.35 lakh cr landmark for the first time ever. At 10.54 cr folios, the MF industry has added whopping 50 lakh folios for the first time ever, within a short period of just months. Monthly SIP contribution at Rs.9,608 cr is at an all-time high as on July 2021. SIP AUMs at Rs5.03 lakh cr, breach Rs.5 lakh cr landmark, for the first time ever. Retail AUMs at an all-time high at Rs.16.25 lakh cr, now forms 46% of industry AUMs.
Gold prices in India saw its lowest prices in the last five months as the prices stood at Rs.46,000-46,500 range, which is almost Rs.10,000 down from the all-time highs. An improved US employment data and stronger US dollar led to the decline in gold prices. International gold prices are trading at around $1780/oz. We need to keep a watch on US data and the FOMC minutes for the week ahead. The fifth tranche of sovereign gold bonds issued by the RBI for this financial year opened on 9th August. The SGBs will be issued to investors at Rs.4,790 per bond and gold prices have declined below that. Given cost of holding physical gold & 2.5% annual interest rate, SGBs could still be a good alternative.
Global crude prices are down ~10% from recent highs, volatile reflecting current news flows. Crude oil remained under pressure as the fast spreading Delta variant of the coronavirus casts a cloud over the outlook for demand. Recent data from China is indicating that a recent tightening of coronavirus restrictions prompted declines in activity in the world’s second-biggest economy in July. The IEA cut its oil demand growth forecast for the second half of the year by half a million barrels per day, compared with its estimate last month, citing new Covid-19 restrictions imposed in several major oil consuming countries, particularly in Asia.
Consumer Price Index inflation (CPI) eased to a three-month low of 5.59% in July vs 6.26 in June, due to moderation in food prices. Food inflation eased to 3.96% in July from 5.15% in June, while fuel inflation inched lower to 12.38% in July from 12.68% in June. Core inflation — the non-food, non-fuel inflation component — came in at 5.7% in July as against 5.9% in June. CPI it is expected to remain sticky going ahead and may even rise again in the January-March quarter.
Wholesale prices based inflation (WPI) eased to 11.16% YoY in July from 12.07% in June 2021. The high rate of inflation is because of the low base effect and soaring prices of crude oil and manufactured goods. The WPI based on food index has also decreased from 6.66% in June to 4.46% in July 2021. Manufactured Goods have risen from 0.59% last year to 11.20% this July. The softening of the index from the June numbers can be attributed to easing in the inflation index of Fuel and Power that went down from 3.55% in June to 0.53% in July.
Index of Industrial production (IIP) rose by 13.6% in June as against a 16.6% contraction in June 2020, indicating a waning of the low base effect of last year. This was mainly due to the nationwide lockdown which was imposed last year to curb the first wave of Covid-19 pandemic. Among sectors for industrial output, manufacturing, which comprises 77.63% of IIP, rose by 13% in June after an increase of 34.5% in May. Mining output increased by 23.1% and power generation increased by 8.3% in June. Industrial output is picking pace but continues to remain below pre-pandemic levels. The index at 122.6 for IIP was lower than that in 2019 when it was 129.3.
The IHS Markit Purchasing Managers’ Index (PMI) for the manufacturing sector rose to 55.3 in July from 48.1 in June as states began easing pandemic-induced localized restrictions. India’s purchasing managers’ index (PMI) for services at 45.4 in July, indicated that the services sector remains in contraction mode for the third consecutive month in July. Firstly, firms are pessimistic about the outlook one year ahead. This shows that the second wave has dented sentiment in a big way. Second, employment fell for the eighth consecutive month in the services industry. Add the potential threat of another wave, and services outlook gets bleaker. The Composite PMI Output Index, which measures combined services and manufacturing output, rose from 43.1 in June to 49.2 in July, but remained in the contraction territory.
As per the Federation of Automobile Dealers Associations (FADA), domestic automobile retail sales witnessed a strong comeback in July this year with positive growth across all vehicle categories. Passenger vehicle sales increased by almost 63% to more than 2.61 lakh units, while two-wheelers and commercial vehicle sales were up 28% to more than 11.32 lakh units and 166% to 52,130 units. Tractor sales during the month rose 7% to 82,388 units. The global semiconductor shortage is now becoming a deep-rooted problem for the PV segment which is now above the pre-pandemic mark.
Goods and services tax (GST) grew 33% YoY in July to over Rs 1.16 lakh cr, indicating that the economy is recovering at a fast pace. In the current fiscal, GST mop-up touched a record high of over Rs 1.41 lakh cr in April, but fell to over Rs 1.02 lakh cr in May after the outbreak of the second wave. In June, collection slipped below the psychological Rs 1 lakh crore mark to Rs 92,849 cr. Central GST (CGST) was Rs.22,197 cr, State GST (SGST) Rs.28,541 cr, Integrated GST (IGST) Rs.57,864 cr (including Rs.27,900 cr collected on import of goods) and cess is Rs.7,790 cr (including Rs.815 cr collected on import of goods).
We have been on an IPO overdrive this year as we have already had 35 mainstream IPOs since 1st January 2021. Only seven of the IPOs this year failed to open with listing gains while four of them are still trading at a discount to IPO price. IPO sentiments have largely been buoyant as most have been oversubscribed multiple times and quite a few IPOs opening at 50-100% listing gains. Stocks like Tatwa Chintan Pharma, Indigo Paints & G R Infraprojects have more than doubled on listing while stocks like Zomato, Devyani Intl and Clean Science & Tech amongst others have listed at over 50% gains. Going ahead we have a slew of big IPOs lined up over the next few months.
As the frontline indexes are hitting all-time highs, we feel we have to be a bit selective in stock picking. Currently daily COVID cases are stagnant around 40k cases/day and talks of a 3rd wave of COVID/delta variant have started. Thus we must be cautiously optimistic going ahead over the next few months. Vaccinations have gradually picked up, but we still have a long way to go and increase vaccination numbers rapidly. This could be a good buying opportunity if there is a marginal correction in markets.
GST collections have picked up again post lock down in 2nd phase of COVID but going ahead, will entirely depend on any impending 3rd wave. IIP numbers are still below pre-covid levels. 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 remain a concern driven by high fuel prices. With high government spending to bring economy back to normal post covid, any cut in tax on fuel looks unlikely. This could also lead to a possible rate hike by RBI going ahead. 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.
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Engineers India Ltd – Deep Value
Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 14 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata.