The Nifty Hits 20000, Investors Turn Cautious
As the developed world experiences a recession, the picture is different in India. Services and industrial-production sectors have helped expand economic output. However, surging food prices have hit consumption levels and worsened sentiment
Our Top Reports For Today
- [00:50] The Nifty hits 20,000, investors turn cautious, Kotak pulls the plug on midcap story.
- [06:02] A new sovereign gold bond scheme launches amidst a positive outlook for gold with Anuj Gupta
- [12:02] How chronic prescription medicines are shifting online and why Augmentin continues to rule the day with Sheetal Sapale
- [19:17] Consumer products come under pressure as distributors struggle with inventory levels with Dhairyashil Patil
NOTE: This transcript contains only the host's monologue and does not include any interviews or discussions that might be within the podcast. Please refer to the episode audio if you wish to quote the people interviewed. Email [email protected] for any queries.
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Too much of a good thing
First, a glance at the stock markets. The Nifty 50 kissed the much anticipated 20,000 mark.
Or more specifically, it hit an an all-time high of 20,008, surpassing the previous high of 19,991.85 and closed up 176 points at 19,996. The BSE Sensex index, meanwhile, crossed over the 67,000-mark and ended at 67,127, up 528 points.
Now, many funds have been flowing into Indian markets and into equities, from within and outside the country.
Too much of a good thing of course can be bad as well.
A new report from Barclays says that with positive net flows of money into the Indian equity market for the fifth straight month in July, complacency is a distinct risk.
“Despite the strong performance of the local market in recent months, we are cautiously optimistic on the market for long-term investors,” the report says.
As the developed world experiences a recession, the picture is different in India. Services and industrial-production sectors have helped expand economic output. However, surging food prices have hit consumption levels and worsened sentiment. So, growth could slow
Earnings in the April-to-June quarter illustrated the underlying health of the economy. Profits for the 50 largest companies shot up by over 35% compared with the same quarter last year. The financial, auto, infrastructure, cement and energy sectors appear to be performing particularly well
Elsewhere, the situation is a little more dramatic. Stock Brokerage Kotak Securities said it was pulling the plug completely, on mid-caps, a segment and space we have discussed in some detail here on The Core Report, with growing amazement and incredulity.
In language which is quite stark and a little unusual for a brokerage report, Kotak Securities says “We see limited points in trying to find fundamental reasons behind the steep increase in stock prices of several mid-cap. and small-cap. stocks. There is no meaningful change in the fundamentals of most companies; in fact, they have worsened in many cases. The primary driver of the rally appears to be irrational exuberance among investors, with high return expectations (and purchase decisions) being driven by the high returns of the past few months.”
By the way, the Nifty Midcap index is up 32% and Nifty Smallcap Index is up 35% in the past six months.
It also points out that mid-cap. and small-cap. funds of domestic equity mutual funds have seen inflows of over Rs 21,000 crore while large- cap and flex-cap funds have seen outflows of Rs 6,000 crore.
Moreover, some 6.4 mn new folios opened in mid-cap. and small-cap. equity mutual funds in the past 12 months a 34% increase.
So small and mid caps funds have been attracting fresh investors into the stock markets, like bees to honey.
More specifically, Kotak Sec says many of the new favourite mid-and-small-cap. stocks of institutional and retail investors are in the broader ‘investment’ sector (capital goods, defence, EMS, railways, real estate, renewables).
All these stocks have shot through the roof.
On a more candid note, Kotak Sec says it expects a decent investment cycle, but we are not sure about the quality of many of the stocks given their historical weak execution and governance track-records.
In addition, many of these sectors fall in the B2G (business-to-government) or B2B categories, which raises issues around execution and profitability both.
We believe that market expectations for both revenues and profitability may be too optimistic across these sectors.
We are dropping our recommended mid-cap. portfolio since we cannot find too many stocks beyond the BFSI space that offer decent potential upside to our 12-month Fair value.
We would have had to remove these stocks from the portfolio anyway, as it would be incorrect to recommend stocks with low conviction and potential downside to our Fair Values, which would have left a portfolio comprising BFSI stocks largely.
Many of the stocks have jumped in the past few months (some within weeks of inclusion in the portfolio). We have changed the portfolio frequently in the past few months to keep up with rampant stock prices, but have largely run out of options now.
And finally, in what sounds like a cross between a lament and a confession, if everything so far was not already, Kotak Sec says it is obvious that we have not developed some special stock- picking skills recently.
In our view, the steep increase in stock prices simply reflects the irrational exuberance of investors in the mid-cap. and small-cap. parts of the market.
GOLD BONDS
As we speak of stocks and the irrationality of it sometimes, time to look at other asset classes. As you know, we speak a lot on stocks and real estate but have not touched gold. About time since we have some news to report too.
The Reserve Bank of India (RBI) has established the issue price of the Sovereign Gold Bond (SGB) for the September 2023 series at ₹5,923 per gram. The upcoming instalment of the program will be available for subscription from September 11, 2023, to September 15, 2023.
How has the price been arrived at ? Well, it is the nominal value of the bond based on the simple average of closing price [published by the India Bullion and Jewellers Association Ltd (IBJA)] for gold of 999 purity of the last three working days of the week preceding the subscription period, i.e., September 06, September 07, and September 08, 2023, works out to ₹5,923 per gram of gold.
I reached out to Anuj Gupta, Head of Commodities & Currencies at HDFC Securities and began by asking him to tell us about sovereign gold bonds in general and the current one in specific.
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Chronic Disease Medicines Are Increasingly Shifting Online
New trends are emerging in the pharmaceutical industry worth around $50 billion in India.
If I were to sum them up.
Online pharmacies have been gaining popularity for chronic segments where people are ordering the same medicines again.
Augmentin is the number one drug in the country. But the reasons are actually quite interesting and you might want to wait to hear why.
The other top drugs are Pan, Volini and Manforce which have grown strongly.
And finally, there is much action in the cardiac therapy space. More on that coming as well.
I reached out to Sheetal Sapale, vice president commercial at pharma industry intelligence firm Pharmarack and began by asking her to take us through the latest set of trends she was seeing.
Slowing demand is telling on the consumer products distributors
Consumer products are not moving as smoothly as they did before.
The data does not quite show this but from the distributor standpoint or endpoint, this is the first time that volume offtakes are down, both in urban and rural markets in a while.
A report from retail intelligence platform Bizom quoted by Business Standard for example, says kirana stores are being careful on how they stock up.
On a MoM basis, sales from shampoos to detergents were down 8.4% in August while they were down 11.2% year on year. Urban sales were up 1.9% though while rural took a hit, down 17.2% year on year.
On the other hand, NIQ (formerly known as NielsenIQ) said in its “FMCG Snapshot” for the June quarter that the April-June quarter of 2023 was the best in a year and a half, with positive strides across all growth vectors tracked by the consumer intelligence firm.
But the impact of rains has kicked in after June so it's the next quarter or current quarter is the one to watch.
Significantly, the contraction in purchases is because people are saving more. All this is also increasing inventory levels for distributors.
I will dive into the savings part in a few days from a macro point of view but for now, I reached out to Dhairyashil Patil, President of the All India Consumer PRoducts Distributors Federation, based out of Kolhapur in Maharashtra and began by asking him, how he was seeing the impact of inflation and surging food prices on demand.
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What’s Next With G20
The G20 Summit goes to Brazil now. You do know, I hope, that the G20 Presidency rotates between member countries. The previous one was Indonesia and the next one was Brazil.
Brazil’s President Luiz Inacio Lula da Silva took the baton so to speak. Figuratively that is.
He also spoke of the Global Biofuels Alliance and said that this is the happiest decision for Brazil as they have been fighting for it.
A total of 19 countries and 12 international organisations have so far agreed to join the alliance, including both G20 members and non-member countries. India, Brazil and the US are the founding members of the alliance.
"We continue to improve the ethanol production in Brazil. Everybody knows what role Brazil plays in ethanol as an alternative to oil. This is the happiest decision for Brazil as we have been fighting for it," Lula said.
"Brazil has tech control on biofuels and this initiative is important for our future," he said.
India wants to achieve 20% ethanol blending in petrol by 2025-26 which is literally in two years time. There is some scepticism on this as I have heard from industry sources.
The Centre's ethanol blending programme or E20 petrol (petrol blended with 20 percent ethanol) is reportedly selling at more than 1,900 pumps across the country.
And the effort is on. And sugar factories, including one I visited a few weeks ago in western Uttar Pradesh, are filling tankers with ethanol manufactured from sugarcane and trucking them to refineries in the region.
I don’t know if you have been near an ethanol refinery. It stinks like mad.
ON that note, that’s it from me for today. Do visit us at www.thecore.in and sign up for our newsletters and detailed reports and columns.
Have a great day !
