April 2021: Why are markets not panicking in the second wave of covid in India?

We had mentioned in our last newsletter about a second wave of covid in India – in the month of April 2021, this wave intensified and it looks like a crisis situation with respect to the ravage of the pandemic in India’s second wave of infections and deaths. Several state governments have announced various degrees of lockdown and the health infrastructure appears to be severely strained. Yet there does not seem to be the same level of panic in markets, as we had witnessed in March-April 2020. The Nifty closed April down 0.4% over its value on 31st March, 2021. We will try to explore the reasons why this may be so.

For one, in February-March 2020 the virus was still very new to all of humanity – there was a lot of the unknown and the stock market reacts badly to the unknown – data and analysis was sketchy and fear ruled in markets where investors dumped stocks without regard for valuations like heading for the exits when a cinema hall catches fire. Today, we know a lot more about the virus in terms of treatment methods and importantly, the vaccination drive has started – a quick vaccination can be the best antidote we can have for the spread of covid. The vaccination drive which was quite impressive a few weeks back, has slipped recently and we hope it gains momentum in the coming months.

Businesses have also learnt to cope with the pandemic and have figured out ways and means out of the situation. Restrictions on manufacturing and construction are also far less this time around. We expect that as the vaccination picks up pace over the next few months, infections and deaths will level off and we can get some semblance of control over the pandemic in India.

At the same time, the results from corporate India have been quite encouraging. As we reported last month, EBIT for Dec-20 quarter was up 27.9% in aggregate and 19.0% for the median company. We now look at the few early birds who have reported so far for the Mar-21 quarter. As usual we looked at the non-financials in the BSE-500 index – 69 companies have reported so far. These 69 companies comprise 31% of the market cap of all the non-financials in the BSE-500 and predominantly are in the sectors of IT, FMCG and Auto. Since the March 2020 quarter was affected by the nationwide lockdown, we decided to look at a 2 year CAGR for revenue and EBIT (Earnings before interest and tax) growth to get a better idea of the numbers. For the early birds who have reported so far, the 2 year CAGR in revenues is 8.0% in aggregate and 7.1% for the median company. This compares with 6.5% and 4.4% respectively for the quarter ended 31-Dec-20 – so it appears that there is some further improvement from December to March. The 2 year CAGR for EBIT is 13.1% in aggregate and 11.8% for the median company – these are impressive numbers in the context of the pandemic and while it would still need to be confirmed by the other companies that have not reported yet, it does signal an important development for corporate India that revenues and profits are getting back to a normal trajectory.

On the valuations front, as we mentioned in our last newsletter, we are finding it difficult to invest for our new clients and at the same time the sell opportunities are also few in number. For a brief while in April, the Nifty had dropped about 8% from its recent peak and that gave us some opportunities to buy within our high-quality universe. We continue to remain focused on the reward to risk ratio offered by the different stocks in our universe to decide what to do for our portfolios.