Don't count the chickens yet


After showing some reluctance in the month of September, Nifty has resumed its uptrend and is sprinting rather quickly to regain the Mount 12K. Many global markets are also within reach of their highest levels in the year 2020. There have been numerous factors that have supported the benchmark indices to reclaim most of the ground lost in February –March earlier this year, but in our view, the following five events are particularly noteworthy in Indian context:

1. The relentless fund raising by the Oil to Consumer behemoth Reliance Industries.

2. Dramatic changes in the fortunes of healthcare businesses in the wake of the outbreak of COVID-19 pandemic.

3. Revival in demand for IT services, especially due to dramatic changes in the work and travel practices, M&A deals and global realignment of businesses, markets and states.

4. Strong liquidity in equity market, as many businessmen and professionals have joined the markets as regular trader due to full or partial lockdown in their respective regular businesses. The spare working capital of many businesses may have found its way in the stock trading.

5. Poor debt returns, lower interest rates on deposits & small savings, and a number of defaults since IL&FS fiasco in 2018 appears to have motivated many investors to change their asset allocation in favor of equities.

We think to forecast the future direction of the market and assess the sustainability of the up move from lows of March. It would be worthwhile to evaluate how long these factors could continue support the markets.

For the argument that economic recovery and corporate earnings will support the markets from here on, we would like to mention just one example.

The stock price of PVR Limited was Rs.1178 at the end of September 2019. In the past twelve months, the company has witnessed total shut down of business for 6 months. For next six months it may not witness more than 50% occupancy and much lesser F&B sales revenue. The company continue to incur one third of its regular operating expenses; the interest expense was little higher than usual. Obviously, the balance sheet position of the company has weakened and may continue to weaken for another year at least. The market celebrated the announcement of opening of cinema halls with stock price rising 15% in two days. The current price is 7% higher than what it was in September 2019, with much weaker fundamentals and strong growth uncertainties.



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