Are you skeptical about the rising Market? Look at the future clearly with an ear on the ground
What is the road ahead?
Key parameters
The Economy is likely to see a return to precovid levels around mid Q4 financial year 2021-22 if cases do not rise further. The GST numbers have been showing a steady rise of 7% on a year on year basis. This is a broader indicator of recovery although at the ground level most firms will be lucky to look at 60-70% of precovid levels as per inputs on the ground across manufacturing, trading and service businesses.
The earnings growth has been driven by volume recovery in Bharat and India. Cost efficiencies have been the norm although with inflation linked to scarcity for the sector in question the earnings and GST number continue to show marginal growth for certain sectors. These numbers are also reflected basis the risk premium in pricing for covid led services.
Inflation
Inflation has been moderate however going forward Petrol at 100 rupees a litre and diesel price increase is likely to enhance possibility of a higher inflationary situation. The base case scenario seems to be at 60-65 dollars per barrel for the year. This is an important indicator to be watched at going forward. An extreme fall is unlikely as no major oil producing nation can afford a major fall in prices given the weak nature of economic recovery so far.
Lending
One principal issue with Banks and NBFC’s is the rise in personal loans and Credit cards. In previous business cycles the rise in personal loans has seen a spike in NPA’S internationally as well as in India as we are fast becoming a consumerist society thanks to online discounts by leading platforms. This over the next 2 quarters if not shown an increase is unlikely to be an impediment for economic recovery. If NPA levels rise the economic recovery is likely to be hit as Banks may take a more conservative stance. In our opinion the recovery for NBFC lending is likely to begin around the 3rd quarter as it is dependent on Bank lending. In the first quarter 2022 we may see meaningful lending. This is critical as majority of the broad based economy does not qualify for bank lending.
This is extremely relevant for an economic revival on the ground.
Infrastructure Building
The Budget has focused on giving a stimulus which is the number one growth enabler in the overall scheme of things. Disinvestment receipts over the course of financial year 2021-22 are likely to be a catalyst in the overall scheme of things. This is more so with LIC and BPCL along with PSU’s.This is likely to create demand over the next couple of years.
Monsoons
If we witness a normal monsoon we are likely to see a demand uptick in Bharat as well as a continuation of existing demand in Urban India. If it is less than 88 percent of normal monsoon levels the recovery could be a challenge.
What is the Nifty level upside likely to be if things go right?
If everything goes right we are likely to see Nifty levels of close to 17000 around March next year. On a base case scenario levels of 16500 appear achievable given the government stimulus to infrastructure and hopefully the private sector catches up in select sectors like Infrastructure and Automobiles basis the same.
It is a mix of the monsoons and government spends which are likely to see us steer through this economy over the Medium term. Invest carefully.
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