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More states announce restrictions

Corporate commentaries in 4Q turn cautious

* The COVID second wave has led to the imposition of restrictions across various states and union territories. Over the weekend, several states such as Uttar Pradesh, Tamil Nadu, Karnataka, and Kerala as well as Delhi imposed / extended restrictions to curb the spread of the virus.

* More than 15 states in India have a positivity rate of more than 20%, taking the overall India positivity rate to over 22%.

* Due to the widespread nature of the pandemic, India is likely to continue to face restrictions for some more time – until substantial decline is seen in the positivity rate and active cases.

* Management commentaries from the on-going 4QFY21 earnings season clearly indicate that demand would moderate, especially post the second half of April; this is expected to continue in May’21. It would clearly impact earnings in 1QFY22 and impair the visibility of FY22 earnings, in our view. Our research team has thus far in this earnings season cut estimates for more companies than the upgrades given for FY22.

* That said, the market is looking beyond this near-term weakness and has been resilient despite the severity of the second wave. We continue to recommend the addition of select cyclicals and remain OW on BFSI, IT, Cement, and Metals. We maintain a NEUTRAL stance on Consumer, Auto, Healthcare, and Capital Goods.

Positivity rate above 22%; states impose lockdown

* Despite the central government not having announced a lockdown, all the major states have imposed restrictions or total lockdown to prevent the spread of the virus. As shown in Exhibit 1, most states have imposed total lockdown, similar to that seen in Apr’20. More concerning, however, is that the states continue to extend the lockdowns as the number of cases increases.

* With positivity rates being above 20% in 15 states/UTs, it is unlikely the restrictions would be withdrawn soon. Hence, we are likely to see continued restrictions/lockdowns unless there is a substantial drop in active cases. The pace of vaccinations would be another key monitorable as states ramp up measures to curb the pandemic.

* More importantly, the focus of the central and state governments in this crucial time remains on supplying key essential items, such as drugs, beds, and oxygen, to keep the fatality rate as well as the absolute count of fatalities lower.

Corporate commentaries indicate deceleration in demand

* With extended lockdowns and an elevated active case count, corporate commentaries from the on-going earnings season have expectedly turned more circumspect about the sustenance of underlying demand recovery. Discretionary demand is expected to take a major hit in 1QFY22. Some of the sectors/categories dependent on seasonality (Consumer Durables / ACs) and contact-intensive sectors (such as Retail/Airlines/Hotels) are expected to see demand dislocation for an extended period.

* Amid this challenging backdrop, the markets are looking beyond the near-term pain and have thus far remained fairly resilient – this is unlike the panic and volatility seen at the advent of the first COVID wave in 1QCY20. In fact, the midcap and small-cap indices have outperformed the Nifty in April’21. As vaccination drives gain momentum in the country and the active case count starts to recede (some states are showing early signs of peaking), we expect mobility parameters to normalize once again. We continue to recommend the addition of select cyclicals. In our model portfolio, remain OW on BFSI, IT, Cement, and Metals, while we maintain a NEUTRAL stance on Consumer, Auto, Healthcare, and Capital Goods.

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