Wednesday, October 20, 2021
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Big picture: India still has some catching up to do, says Aditya Narain


We are mostly reaching pre-pandemic levels which was basically two years ago. That is lagging what we have tended to see in the developed markets. While it might not have been so sharp in the most recent months, the revival has been a little longer there and most of those economies are tending to see activity levels which are a little higher than pre-pandemic levels, says Aditya Narain, Head of Research, Edelweiss Securities.

Markets are excited about consumers making a comeback. Can we afford to ignore what is happening in the energy complex given that it will have direct ramifications for India, for consumers and the macros?
We cannot afford to ignore what is happening at that end. It is very simple. We had a hard metals commodity rally for a period of time; we had the softer commodities going and now we have the energy space going. More than just in itself, the fact that input prices across the board have gone up is going to be a little bit of a challenge at some point in time. That is something one definitely needs to keep an eye on and also on the impact it potentially has on aggregate demand.

That said, what the market is cheering at this point in time is aggregate demand or at least high end demand does not seem to have been impacted. If anything, it is actually coming back a little sharper than what people had anticipated. But the bottom line is it is a mix of the two. If there is good demand, it needs to be valued up, but if there is a cost element coming through, one needs to wait and see how that plays through.

Are you surprised with the kind of indications we have got from a Sobha or a Bajaj Finance or for that matter Marico. They are consumer facing businesses and they are pointing to great recovery for the quarter gone by, which does not capture Diwali, Dussehra sales.
Yes and no. At some level, we are seeing a little bit of this at the higher end stuff like Sobha and some of the other developers. There could be a little bit of a wealth effect that is coming through. To some extent, that itself should not be much of a surprise. As we move a little lower down or to the broader end of the market — if we see well above expected numbers, that will be a bit of a surprise and a little bit of a positive. I think it is the broader market that has been a little bit more at risk rather than the top end. So, at the end of the day, the commentary that we have seen leading into and some of the data releases that have happened leading into this result season have probably been a little ahead of expectations.

We need to step back a little bit also. What this measures is the pace of rebound rather than the level of rebound and by that I mean in most of these businesses at best, we are reaching pre-pandemic levels which was basically two years ago. That is lagging what we have tended to see in the developed markets. While it might not have been so sharp in the most recent months, the revival has been a little longer there and most of those economies are tending to see activity levels which are a little higher than pre-pandemic levels.

As far as India is concerned, we are still getting there. So to some extent, the lower starting level in India is reflecting in better numbers and better rebounds than what people have anticipated, but big picture is there is still a little bit of catching up to do.

I would also believe this Diwali and Dussehra season is important to watch because now all the disruptive effects whether it is on the base or in the form of pent up demand, would have played out. So this is going to be a good reflection of the level of demand and where we are seeing shifts in demand. That is very important to catch from a stock perspective.

Going into this earnings season and given the way the consumption stocks have been performing, how should one approach this space?
I would say with a little bit of caution. On the demand side, the way the economy has rebounded, we are still looking at aggregates. We still have not got a good enough sense of whether one end is doing well and the other is not for both our average or whatever that mix is.

As the demand side is concerned, to some extent the jury is still out. As far as the cost side is concerned, the writing is on the wall and that is going to be a little difficult for the next one or two quarters. So in that context, I would generally tend to be a little cautious in terms of the consumer facing ends of it simply because the next switch may not be a great mix which is likely to play out.

Trends like the wealth effect or premiumisation, are likely to consolidate a little bit in this quarter and to that extent, depending on at which end the businesses lie, the outlook might just be a little different. In the earnings season, the headline numbers that we are expecting are closer to about 37%, but strip out the banks and the commodities and the number is looking more like 12%.

If we were to take a two year CAGR, it is more like 4%. So a lot that lies in between and that is what we got to watch.

If you are saying net-net 4%, let us talk about banking. Isn’t that a big opportunity because the financials have started doing better? Also the financial stocks have been laggards in the stock markets recently except for Bajaj Finance?
Quite honestly, that is a space we like. We do believe that at the end of the day, the growth cycle has to be reflected in the banking sector and that sector has to show steam if the growth cycle is to sustain.

In that context, we do believe it is a little bit of a laggard from a market price perspective. We believe there should be a certain amount of catch up but we also believe that one needs to start seeing loan growth come through at some point in time. What we are seeing in terms of bank earnings at this point in time, at least if one were to go by expectations, is that it is really a credit cost driven story.

The low base effect element that is playing through at this point in time. The underlying health of it or the underlying tie in with perceived economic upswing needs to reflect as far as credit growth is concerned.

Coming to the big picture, that is where we might face a little challenge even though we like it. We may end up getting growth which is not necessarily linked to credit as has been the case with all historical cycles whether it is in India or whether it is globally? That is something we might need to watch for.



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