Even if the economy is doing badly, the formal sector is rallying well, and that’s what the Sensex is all about
The rally in India’s stock markets from the lows in mid-March all the way to 50,000 has been spectacular. While, in the initial stages, the rise in the benchmark indices was driven by a bunch of stocks, the faster-than-anticipated recovery in the economy and the arrival of the vaccine have contributed to broadening the rally. While there is no doubt that an abundance of global liquidity has allowed investors to pick up assets, the fact is that investors believe corporate earnings in India will grow at a good pace despite the disruption from the pandemic and the accompanying lockdowns. To a large extent, their confidence is justified. With the economy becoming increasingly formalised, the organised sector continues to gain market share from smaller, unorganised players. This is true across a host of sectors, from electrical goods to paints, and even biscuits.
The pandemic disturbed supply chains across industries, but the larger players have managed to restore these more quickly and get back on track, on the back of their financial strength. In contrast, smaller enterprises without access to affordable credit have been badly hurt and unable to resume operations fast enough.
With people preferring to order groceries and household items online, more branded products and private labels would have been purchased. But it is not just staples, organised players in other sectors too seem to have picked up market share. The management at Havells, for instance, attributed the company’s strong performance in the December 2020 quarter to share gains from the unorganised sector that boosted revenues of its consumer electronics division.
So, accompanying the recovery in demand is a trend where the organised sector players are growing faster. Moreover, as we have seen in H1FY21, companies have been able to reduce their costs significantly, and that has helped boost their bottom lines. To be sure, some of the expenses will resurface, but the fact is companies are automating fast and can make do with smaller workforces. Where the cost of production has risen—for instance, in the auto sector due to the move to BSVI—companies have been able to pass these on to customers. Similarly, they should be able to pass on any rise in input costs. For any consumer-oriented business, the addressable market of, say, 260 million people is reasonably large.
Not surprising then that foreign portfolio investors are fascinated with Indian stocks; they have already invested $3 billion in equities in January so far. In 2020, they made record purchases, of over $23 billion. There are those who would argue stocks are terribly expensive and they are right. But investors seem to be confident that companies will continue to report strong earnings growth for the next few years and are, therefore, willing to pay a premium. While the performance of commodity players swings in line with price cycles, financial intermediaries, IT players, FMCG majors and drug manufacturers have strengths they leverage. Their performance would be less dependent on the performance of the economy—tipped to grow at 10-11% in FY22 and 6% in FY23.The Q3 results of IT players have been nothing short of spectacular. Manufacturers like Bajaj Auto have done well, with strong revenues from exports, and retailers like Avenue Supermarts are recovering fast. This market is about the top-500 companies in India, the leaders in their respective segments. It is not representative of the larger economy. And that is why it is rallying on.