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Q3FY21 demand largely pent-up driven; environment turning conducive for ‘invisible hand’ to drive sustainable demand ahead

Can pent-up demand convert into sustainable demand? Pent-up demand, driven by the opening up of the economy and festive season, definitely had a larger role to play in the areas showing robust demand trends (construction, manufacturing & selectively consumption) resulting in a strong earnings season with a beat/miss ratio of 4.3x during Q3FY21.

Discretionary consumption such as retail and leisure which continue to contract, will see incremental pent-up demand getting released as Covid cases recede, which is evidenced by their mobility trends (-21% below baseline but rising; Google mobility). Robust high frequency data for Q4FY21 so far, such as PMI & GST collections, indicates that recovery is extending beyond the festive season and does indicate signs of sustainability of demand both for manufacturing and services.

Overall, we believe that the environment is turning favourable in terms of a countercyclical fiscal policy with focus on capex (higher multiplier effect on demand), progrowth oriented policies, lower interest rates, ample liquidity and optimism around a fully-operational economy as Covid cases recede (although cases are increasing in some geographies). Above environment is conducive for driving the ‘invisible hand’ which could boost aggregate demand from ‘private sector and households’ sustainably beyond the pent-up demand seen in Q3FY21. Rolling forward earnings to FY23 EPS and assigning bull market valuations of ~20x P/E, our target for the NIFTY50 is 16,300.

For detailed sectoral commentary by our analysts, please refer pages 12 to 16

Micros to macros – pent-up demand visible: Q3FY21 corporate results indicate that aggregate demand showed up in the form of double digit volume growth for activities like construction, consumption (select FMCG products, auto & paints), manufacturing (cement, building material, auto & chemicals). Telecom revenue growth was strong for market leaders (>20%) while utilities showed moderate growth (<10%). Domestic pharma sales ranged from moderate to strong (5-25% YoY). Demand negatively impacted by volume contraction in discretionary consumption (retail, leisure, travel & restaurants) and selectively in manufacturing (regional cement manufacturing and power - capital goods). Exports picture improved with merchandise exports showing improvement (auto, ceramics, chemicals) while IT services were steady; US pharma exports, however, were subdued. Rising prices helped realisations for metal & cement sectors while helping in inventory gains for oil companies.

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