The Week’s Talking Points—Crises And Opportunities

In ‘The Week’s Talking Points’, Niraj Shah studies how top business leaders and market makers are navigating the pandemic-altered financial landscape.

Are Indian cities overheating, not just in climate terms, but economically too? While demand is roaring back, the supply side is stunted, preventing the economy from recovering properly. One corporate voice after another is speaking of a gap, from logistics issues, container availability, to now concern over the availability of power. The big question is, are cost pressures due to supply-side constraints the main villain? Experts offer conflicting views.

In an offline conversation, veteran investor Maneesh Dangi noted how a "shortage of everything" is hard to resolve by itself. He wonders whether the only solution may be to slow the world economy. The only instrument that is available to do so is to tighten monetary policy and fiscal spending, both of which put the frenzy around risk assets in question.

Aditya Narain of Edelweiss believes this shortage scare will blow over, and normalcy will resume soon. In fact, while there are divergent beliefs about whether there is a shortage of the supply of a range of goods or not, India's coal ministry stated unequivocally that there won't be any issue with coal availability. But, watch this space carefully as there is no smoke without fire. It is not for nothing that the Union Home Minister held meetings with power and coal ministries on this issue.

An Oasis Of Certainty

Will growing corporate profits and optimistic commentaries be the only constant amid all the recent uncertainties? Corporate performance has been a major source of stability for equity markets in the coronavirus age, not just in India but across the world. As the pandemic waxed and waned, companies consistently proved their resilience, beating analyst estimates. In the U.S., companies did so by at least 15% for five quarters in a row.

The Indian scene was not very different. The question now is whether the street has gotten used to these robust numbers, making it more difficult for companies to beat estimates, especially as raw material supply gets unpredictable and other uncertainties grow. To be fair, while the expectations are of a strong quarter, everyone throws in the caveats—on how the quarter may be strong but stripped of metal earnings, will not be a blowout. Valuations demand a strong Q2, with no buckling down of guidance. Let’s see if the cost heads allow that to play out.

The Weight Of Great Expectations

The average price-to-earnings multiple for Indian IT companies has moved up quite significantly. For these multiples to sustain, the companies need to put their best foot forward, arguably every time. Those bullish on Indian IT were hopeful that despite short-term challenges, Q2FY22 will clear some uncertainty around attrition and margins. What we got from the companies was:

TCS: A large miss in quarterly delivery, even though guidance was maintained. TCS ended the first post-results trading day lower by over 5% and ended the week nursing losses of slightly over 6%.

Infosys: A strong quarter with a sequential constant-currency growth of 6.3% versus consensus estimates of 5.6%; and it raised the guidance, again, to 16.5-17.5% for the year.

Wipro: Sequential constant-currency revenue growth of 8.1% was a beat on most estimates, and higher than TCS’ growth as well, even as some part of the beat was driven by higher-than-expected cross-currency benefits.

The market’s hope is that the treatment of IT services as opex rather than capex would mean that the business visibility is better. That would give investors more confidence on earnings predictability and that higher multiples will sustain. The one concern though is higher attrition. Attrition for three of the top four I.T. majors jumped by at least 300 basis points, with Wipro and Infosys seeing a 500- and 620-basis-point jump respectively, nudging the 20% mark on attrition. It will be the most-watched metric in H2FY22. That could also be one reason for southern real estate companies to do well, with potentially higher demand from IT services employees who are, in turn, in hot demand.

All Charged Up

The biggest talking point of the week, ironically at a time when the world is worried about a shortage of all fossil fuels, was the large investment that the electric vehicle arm of Tata Motors attracted. With TPG Rise Climate and ADQ investing Rs 7,500 crore in the newly incorporated passenger electric vehicle unit, that business gets an equity valuation of up to $9.1 billion.

Curiously, Morgan Stanley raised the target price on Tata Motors a few days ago, with an upside of 33% then, without the EV investment being any part of the rationale. Morgan Stanley cited the JLR cash flows, the commercial vehicle business turnaround, and overall strong performance from the Indian businesses. It was little wonder then, that after the announcement of the billion-dollar investment, brokerages were scurrying to raise the target prices on Tata Motors, with the highest target from ICICI Securities of Rs 646/share. Speaking to BloombergQuint, the Tata Motors management was confident about the business scale-up, adding that the Tata Group is not waiting for any PPP model to emerge to build out an EV-enabling ecosystem in the country, but is rather taking it upon itself to work on the vehicles as well as some parts of the infrastructure.

All Rise

We end this week’s piece with a chart that shows that the reopening trade is not an India-specific phenomenon. Thailand is being cited as a key beneficiary from a rebound in tourism, and Indonesia is being touted as a winner thanks to its huge natural resources sector. As a result, the Asean index has jumped about 4.5%.

India is strong, yes, but there are others batting solidly as well.

Niraj Shah is Markets Editor at BloombergQuint.