Why India’s stock markets are decoupled from the economic reality – The Economic Times

Clipped from: https://economictimes.indiatimes.com/opinion/et-commentary/why-indias-stock-markets-are-decoupled-from-the-economic-reality/articleshow/83616882.cmsSynopsis

One, markets by their khaasiyat — their very nature — are decoupled from the economy. They are either forward looking or despondent. The Bombay Stock Exchange Sensitive Index (BSE Sensex) bottomed out a shade below 26,000 a day before the lockdown commenced in March 2020.

Mudar Patherya

Mudar Patherya

CEO, TrisysWhy are India’s stock markets decoupled from its economic reality?’ That’s what the person who commissioned me to write this piece asked. This, then, is my answer. (‘Don’t exceed 850 words,’ he warned.)

One, markets by their khaasiyat — their very nature — are decoupled from the economy. They are either forward looking or despondent. The Bombay Stock Exchange Sensitive Index (BSE Sensex) bottomed out a shade below 26,000 a day before the lockdown commenced in March 2020.

Thereafter, while we were extrapolating the pain to the economy, the market was doing something else — it subtly began its climb to doubling in less than a year. It was seeing things we never did. Ergo, it was technically decoupled.

Greatfully Repaying Debt
Two, a number of companies are restructuring. Immediately afterTata SteelNSE -3.36 % announced its annual results, the next most important theme to come out of the company was a projected Rs 30,000 crore debt reduction.Steel Authority of IndiaNSE -2.21 % (SAIL) announced its annual performance, and immediately told the market that it repaid Rs 16,150 crore in the fourth quarter. These are the kind of numbers the company would have done in five years.

I see this phenomenon across a number of my clients. (I write annual reports for a living.) A prominent Delhi-based tyre brand that had become synonymous with ‘high debt-equity ratio’ repaid more than Rs 1,000 crore in one quarter. A mid-sized steel company in Raipur has repaid all its longterm debt two years ahead of schedule. A Kolkata-originated non-banking financial company (NBFC), which was feared to stagnate around Rs 15,000 crore of assets under management (AUM), brought in more than Rs 3,000 crore in net worth that has rewritten its destiny in one stroke.

India’s largest interior infrastructure company from Kolkata announced a new plant that will be funded through accruals — so presumably will never take debt to grow. India’s largest bead wire manufacturer from Indore has so much cash on its books that it announced a new manufacturing facility out of earnings (no debt).

I see this reality in a number of places: companies are restructuring, debt is going out of balance sheets, and financials are doing a ramp walk. This is being priced into equities in the anticipation that higher margins will start kicking in from the current financial year.

Three, some of the decoupling is originating from the government’s long term policy. The National Biofuels Policy is a good instance. Sugar companies with distilleries are being re-priced each time the prime minister whispers the word ‘ethanol’. The rebalancing is still work-in-progress. Some sugar companies will increase their ethanol capacity no earlier than the 2022-23 ethanol year. But the market has convinced itself that this has already happened and the money is lying in a corner waiting to be collected.

For all those who feel that this is shamelessly speculative, I present a reverse argument. GoI intends to blend petrol with 20% ethanol by 2025. Which means that the pressure is now on sugar companies to produce as much as possible (as distinct from the pressure on them to find a market). Besides, there is a strain of thought that as sugar manufacturers evolve into agri-based energy companies, they will migrate into environmental, social and governance (ESG)-centric portfolios for the really long term (over 10 years).

So, what difference does it make if one has to buy a sugar stock that has more than doubled in just two months because, in the long term, it won’t really matter? Decoupled? Possibly. Coupled? More likely, considering the time horizon of one’s investment.

Greased Castors, Anyone?

Four, a number of analysts are seeing the ‘decoupling’ as one of the first signs of the world exploring a Plan B to China. The result is a greater interest among global companies to prospect Indian companies for products supply, and probable collaborations. Now, this could be compelling.

From the perspective of the next few quarters, the market could appear overpriced based on a historical measure that we have considered sacred for decades. But what if India were to emerge as ‘the next China’, create wealth faster than ever since Independence? And even if that added the next $2.3 trillion in only the next six years (three years beyond what the PM had once predicted), it could still be the fastest quantum accretion to GDP in the country’s existence.

Five, GST benefits have begun to become evident for large organised companies. One of the most prominent innerwear companies in India from Kolkata indicated it could get finished products to dealer stores faster than unorganised competitors during the lockdown, a lead it maintained through the rest of the year (and promptly deleveraged). A Delhi laminates client indicated it was the first to be up and running in its sector after the government provided permission, carving away market share over unorganised players.

This K-shaped recovery indicates that, perhaps, the organised companies are growing faster. Since the latter are represented on the exchange and indices, their growth is strengthening the indices while those looking at SMEs are likely to ask, ‘Is the economy really buoyant?’

That finishes my argument. And I haven’t yet used ammunition like ‘dollar weakness’, ‘retail participation’, ‘bonds buying’, ‘Zerodha impact’, ‘money printing’, ‘interest rates’, ‘digitalisation’ and ‘IPOs’. Some other time.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s