November 2020: Q2 results indicate that the economy is stabilising

November was an extremely strong month for Indian equities as the Nifty surged 11.4% during the month, one of the strongest one month returns seen in recent times. The rally seems to be driven by FIIs who have been relentless buyers during the month. FIIs have net bought roughly $21bn of Indian equities in the first 8 months of this financial year as compared to $1.3bn in the previous financial year – of that $21bn, $8.1 bn was purchased in the month of November alone. There has been an increase in global liquidity as the Fed and other global central banks keep interest rates extremely low and the news about the vaccine also boosted sentiment. The high flows into India could be linked to the weakening dollar in recent months against major global currencies, which tends to boost “risk on” sentiment.

With the markets being quite cheerful, we thought it would be a good time to review the aggregate quarterly results of the corporate sector. As we have done before, we looked at a data set of the companies currently in the BSE500 index excluding the banks and financial services companies. The quarter ended June 30, 2020 was obviously terrible in terms of quarterly results because of the nationwide lockdown which has been slowly lifted over the last 6 months – aggregate revenues were down 33% and the median company’s revenues were also down 34% yoy. Operating profits (profit before interest, earnings and tax) were down 45% in the aggregate and 49% for the median company and the profit before tax had similar large declines. In the quarter ended September 30, 2020 however as the lockdown has lifted substantially, the numbers seem to have stabilized – revenues are down 7.4% in aggregate and the median company’s revenue is down only 0.5%. Now comes the somewhat surprising bit – operating profits are up 15.8% in aggregate and 8.9% for the median company. Profit before tax too is up 21.8% in aggregate and 7.3% for the median company. The 3 PSU oil refiners have an issue with the base quarter of September 2019 and also have shown strong growth in profits in September 2020 quarter – if we remove them from the set we are analysing, the aggregate growth in operating profits is still a reasonably strong 10.4% and for the median company the number is 8.0%.

It appears that we are past the worst of the economic effects of the pandemic related lockdown and the economy is showing signs of stabilizing. Some of the strong growth in profits is linked to reduction of various expenses for corporates such as travel, hotel, advertising and selling expenses and others – some of this could be temporary in nature while some part of it could be longer lasting as corporates use this opportunity to use ‘digital’ as a means to drive efficiency in their organizations. Some of the stabilization in revenues could be linked to pent up demand from Q1 and we will need to observe the next few quarters to see how the economy slowly returns back to normalcy.

Meanwhile the strong run up in stock prices (with the Nifty at an all-time high) has meant that valuations are inching up – as such we are finding fewer opportunities to invest among our universe of high-quality companies. It has been a swift turnaround from March, 2020 when we spoke about “mouth-watering” stock prices to now when we are suddenly finding it difficult to invest for the new accounts that are opening with us, because the market is no longer offering a good reward to risk ratio for our universe of high-quality stocks.