May 2021: Nifty scales a new high

The Nifty scaled a new high towards the end of May 2021 and we have come a long way from the situation 12 to 14 months ago when the market was gripped with fear on account of the pandemic. The month of May was strong for Indian equities and our portfolios also benefited. Some analysts are suggesting that a new all-time high portends good things for the market going forward.

Last month we had spoken about the “early birds” among the BSE 500 companies (non-financials) that had reported till then. Now more companies have reported quarterly results and we thought it would be a good idea to look at how corporate results are shaping up. We looked at a 2 year CAGR because the quarter ended Mar-20 was impacted by the nationwide lockdown. For the 294 out of the total 430 non-financials in the BSE500 that have reported so far, the 2 year aggregate revenue CAGR is 4.6% – this compares with -5.4% in Sep-20 and -1.0% in Dec-20 – so there is reasonable improvement seen with passing time. The aggregate EBIT (Earnings before interest and tax) growth for these companies has recorded a 2 year CAGR of 16.8% which is very impressive indeed. EBIT margin is at 13.9% which is among the highest recorded for the last several years. The higher profits are aided by better performance from the commodity sectors as also a reduction in several costs because of work from home. These are obviously numbers prior to the second wave of the pandemic, and one can argue that the numbers for the June 2021 quarter may not be as robust. Yet these numbers do give us a picture of what has been happening to corporate results during the pandemic and it is possible that the market is looking beyond the second wave of the pandemic as increasing vaccination will likely result in lockdowns being lifted over the next few months and the economy reverting to its normal trajectory.

We have witnessed a significant slowdown in net profits for the corporate sector over the last several years, as the economy has faced the brunt of several problems, from the demonetization in 2016 to GST implementation and then the ILFS crisis, as also the recognition of NPAs (non-performing assets) by the banking sector. The results over the last few quarters give us some hope that the economy may be reverting to a more normal trajectory. We will have to watch the corporate results over the next few quarters to get confirmation of this.

With the market scaling new highs, we have seen some of our portfolio companies moving to the higher end of their valuation ranges and we have chosen to take some chips off the table, by trimming some of these positions. This is part of our usual process whereby, we look to buy stocks when they are at the lower end of the valuation range and look to reduce positions when the stocks are at the higher end of their ranges. What is interesting though, is that even with the market at a new high, there are some stocks in our portfolio which are offering dividend yields in the 4-5% range, which is quite close to the rate offered by fixed deposits in the current low interest rate scenario. So, it remains a stock specific market with some stocks offering a reasonable reward to risk ratio. We shall continue to be focused on the reward to risk ratio offered by the different stocks in our investment universe of high-quality companies to decide what to do with the portfolios that we manage.