SAMPATH REDDY
Strong liquidity and expansion in valuation multiples have been a key contributor to the market rally in the past year and a half, but the good performance of companies has also contributed to it. There is no need to panic about the recent market fall. Not expecting a huge drop in the market. Now going forward, the market will see support from the good results of the second quarter.
The software services sector has seen a sharp rise in revenues due to a fall in costs due to employees working from home and companies increasing their spending on digital technology. Due to increasing expenditure on technology, software companies seem to be getting big deals. Due to this, the earnings of these companies will be seen increasing in this financial year as well as in the next financial year.
Commodity prices have risen due to supply constraints. Due to which there has also been a sharp recovery in the steel, aluminum, cement and chemical sectors. Strong cash flows from steel and aluminum companies are allowing them to de-leverage their balance sheet.
Simultaneously, the corporate profitability cycle in India is seen in an uptrend. In the last few months, as the second wave of corona has eased, the restrictions of the lock-down are being removed. All the figures related to the economy are indicating that economic and business activities in the country are returning to the pre-Corona condition. Along with this, the pace of vaccination has also been very fast in the country.
Along with this, the pace of corona vaccination in the country has also been very fast. In view of this, the belief is arising in us that the shock to the economy from Corona will soon be a thing of the past. RBI also estimates that GDP growth will recover to around 9.5 percent in FY 2022. Keeping all this in mind, we believe that the strength we see in performance across the companies will prove to be sustainable.
Looking at the previous figures, the earnings growth of companies has not been in line with GDP growth for many years. But a sector like banking, which has been under pressure due to poor asset quality for some time now, seems to be revived. There are signs of growth in their profits. Similarly, there is a strong recovery in the earnings and profits of the metal sector. After the decision of NCLT, the effect of consolidation in the metal sector is now being seen.
Similarly, for the past few years, the pharma sector was also going through a bad phase due to the action of the US FDA and price pressure in the export market. But now this sector also seems to be recovering from these pressures. In view of this, it can be said that once again the Corporate Profitability Cycle (Profits of companies as a percentage of GDP) in India is now seen in an up trend after more than a decade of pressure.
We believe that the performance of the companies will be strong and sustainable going forward. Which will give support to the market. Any correction in the market will not be too deep, even with higher valuations.
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