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Nifty 50 Index (NIFTY) closed flattish for the month of October, underperforming global peers during the month. This is post strong gains registered during the month of August and September. On a year-to-date basis Nifty is up 26% and has significantly outperformed both global and emerging markets. Sectorally Auto, Banks, Media and Energy outperformed, while FMCG, Pharma, Metals and IT underperformed during the month.

The month also witnessed intense profit booking with Nifty down 4-5% from its intra month high. Significant outperformance for the year, likely tapering by US Fed starting November and mixed results by corporates weighed on investor minds. Foreign Portfolio Investors (FPI) too turned net sellers for the month post reporting two consecutive months of inflows.

The Monetary Policy Committed (MPC) maintained status quo on rates and stance. Repo rate unchanged at 4%. Reverse repo and marginal standing facility (MSF) rate unchanged at 3.35% and 4.25% respectively. Stance remains “Accommodative”. All six members voted for keeping repo rate unchanged while one member voted against “Accommodative” stance. The “Accommodative” stance to continue as long as necessary to sustain growth on a durable basis and to mitigate the impact of COVID-19 on the economy, while ensuring that inflation remains within the target going forward.

The Index of Industrial Production (IIP) in August grew 11.9% YoY. On a 2-year CAGR basis IIP grew 1.9% YoY. The improvement is mainly led by mining and electricity generation, (>6% on 2Y CAGR). Manufacturing however remains weak at 0.7%. Sectorally capital goods and consumer durables were weak, other categories – non durables, infrastructure goods, primary goods are relatively doing well.

September consumer price index (CPI) dropped further to 4.3% (from 5.3%). Food inflation declined to 1.6% led by outright deflation in cereals and vegetables. Core inflation, however, remained sticky at 5.8% with energy-related segments down 20bps to 6.6% and goods inflation rising 20bps to 7.2% (reflecting input price pressures).

In terms of flows, Foreign Portfolio investors (FPIs) turned net sellers during the month. FPI out flow stood at USD 1.2bn during the month. Domestic Institution Investors too turned net sellers to the tune of USD 90mn during the month. On Year-to-date basis, FPIs have invested while Domestic Institutional Investors (DII) have invested USD3.6bn.

Second quarter earnings season has commenced. Street expects Nifty revenues to grow at 25% YoY. This follows 51% revenue growth in 1Q. The strong growth is led by recovery and a favourable base effect. Compared to 2QFY20, revenue would grow at 2 yr CAGR of 8%, indicating recovery as compared to pre covid. Amongst sectors, Retail, Metals, Oil & Gas and Chemicals likely to grow at over 25% YoY. Media, technology and consumers to grow at 15-20% yoy and auto, NBFCs , Capital goods to grow at sub 11% growth. Nifty net profit is likely to grow at 25% YoY. Metals to contribute to bulk of incremental profit growth here followed by private banks and Technology. Whereas Auto likely to be a drag on profit growth led by pressures on margins.

Street estimates is for NIFTY PAT to grow at 33% during FY22 and 20% in FY23. We will have to see whether this fructifies. Nifty corrected by 4-5% during the month. Post correction, Nifty continues to be amongst the best performing market amongst global and emerging markets. Given significant outperformance some consolidation seems likely. However, considering strong earnings growth and earnings yield gap (Earnings/ Price and 10 year Gsec yield) seems to remain in favourable zone, we remain optimistic on long term prospects.


Sanjay Chawla

Chief Investment Officer

Source: Edelweiss Financial

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