by Aakash Athawasya
What started with one of the worst crashes in Indian stock market history in March 2020, ended with an unprecedented revival by the time the curtains came down on FY21. In the first Analyticks of FY22, we look at four sectors that are expected to come back stronger in the next few quarters.
Let’s dive in.
The Indian economic recovery
The expectation from global organizations like the International Monetary Fund at the start of FY21 was emerging markets would be the worst hit due to the pandemic. But the stock market and economic recovery in India has so far, poured cold water over these predictions.
Morgan Stanley, in a recent report, advised investors to increase allocations to emerging markets. Among emerging markets, Morgan Stanley is most bullish on India, expecting it to outpace other emerging markets in FY22. However, growth expectations are varied. The World Bank said India’s real GDP growth in FY21 could range between 7.5-12.5%, against the government’s estimate of 11%.
Infrastructure sector and Auto OEMs to recover in FY22
In April 2020, the output of India’s eight core industries - coal, crude oil, natural gas, petroleum, fertilizer, steel, cement, and electricity, declined 38% YoY due to capacity restrictions. By September, core sectors’ output recovered, but a 2% YoY contraction remained.
Analysts suggested this revival was due to increasing gross value added, as costs decreased. This is when India Ratings revised its rating on the infrastructure sector to ‘improving’ citing an expansion in orders. In Q3, the government boosted new infrastructure projects by allocating an additional Rs 6,000 crore to the National Investment and Infrastructure Fund (NIIF) supporting the Centre’s National Infrastructure Pipeline (NIP) projects.
In Q2, automobile original equipment manufacturers’ (OEMs) wholesales rose. According to the Society of Indian Automobile Manufacturers, in August, auto OEMs reported wholesales growth for the first time in FY21. The wholesale numbers jumped in Q3 as the festive season boosted retail dispatches of passenger vehicles (PVs) and two-wheelers. However, in November inventory was piling up, as retail sales were low and the Federation of Automobile Dealers Associations of India urged auto OEMs to decrease production.
In November, the government approved a production-linked incentive (PLI) scheme worth Rs 60,000 crore for automobile OEMs. This was the first step to make India an automobile manufacturing hub, said Minister of Road Transport & Highways Nitin Gadkari. Heading into FY22, ICRA expects the sector to grow by 22-25% YoY due to resurgent consumer sentiments and increasing rural income.
Steelmakers expected to perform well in FY22
In April 2020, the price of industrial commodities like iron, steel and copper tanked. By August, with lockdown restrictions loosening, the price of these metals rebounded. This continued in H2FY21 the as manufacturing sector's demand was higher than in H1FY21 pushing the price of Tata Steel, JSW Steel, and Hindustan Copper.
This was helped by declining Chinese supply in January 2021. China is the largest producer of steel with 60% of global production. The drop in Chinese supply was because factories were closed due to Lunar New Year celebrations in early 2021.
In March 2021, domestic steel prices began to moderate. This was due to domestic miners like NMDC reducing the price of iron ore. As the price of steel drops, rising economic activity will drive demand from infrastructure housing, and auto OEMs (74% of total demand) which will rise due to the government spending impetus on affordable housing and infrastructure.
Brokerages and rating agencies expect steelmakers to benefit from rising demand. This is why credit rating agency Moody’s upgraded its outlook on Tata Steel to ‘stable’ from ‘negative.’ CLSA maintained a ‘Buy’ on Tata Steel and upgraded its rating to ‘Outperform’ on JSW Steel, and Motilal Oswal maintained a ‘Buy’ on Steel Authority of India (SAIL).
Pharmaceutical’s PLI rally still has some steam
The pharmaceutical sector, which enjoyed a dream run in FY21, will receive another boost in FY22 thanks to the PLI scheme. In November, the government approved Rs 20,000 crore to promote domestic production of bulk drugs and active pharmaceutical ingredients (APIs).
Even before the scheme was approved, the Indian pharmaceutical industry was growing fast. In the ten months ended October 2020, pharmaceutical companies’ exports grew 18% YoY to Rs 80,000 crore. This pushed the Nifty Pharma index by 62% between April to October 2020, while the benchmark Nifty gained 40% in the time.
Since the scheme was announced several listed pharmaceutical companies have applied for it, including Sun Pharmaceuticals, Cadila Healthcare, Lupin, Dr. Reddy’s Laboratories, IPCA Laboratories, and Alembic Pharmaceuticals. Only two listed companies have been approved under the scheme so far - Aurobindo Pharma, and Aarti Drugs.
While the rally in pharma stocks cooled off in Q4, the outlook for FY22 remains strong. Chinese authorities, in a bid to control pollution closed chemical factories. These factories served the country’s pharmaceutical sector. This ‘de-risking away from China’ will further improve the standing of Indian pharmaceuticals.
You can keep up with the upcoming results of your sector of choice here.
