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Stock Market Newsletter for Jan 2021 – Research & Ranking

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Budget 2021 will be remembered as a transformative, bold, transparent, credible exercise. Just like how Saurav Ganguly built a winning culture into the Indian team during his stint as captain in early 2000s by making the team believe in themselves, Budget 2021 also sets the tone for making Indians believe that we have the potential to be the third largest economy in the world (currently 5th) much before end of current decade besides more than doubling our GDP to over $5tn.

After implementing bold measures in the past such as demonetization, GST, labour+land reforms, PLI schemes, reduction in corporate tax rates, the approach of boldness and confidence to execute continued in 2021 budget.

Budget 2021 – A bold shift from traditional approach

It was a shift from the traditional approach of conservative, deficit-fearing, and populist to displaying greater transparency, fearlessness, re-building and growth.

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Monetize, Privatize & Disinvest

Budget 2021 laid great emphasis on a large disinvestment target, public listing of insurance behemoth LIC, and privatization of certain PSU banks and monetization of non-productive, unused public assets.

Disinvestment in key PSUs

  • Government plans to sell stake in PSUs such as BPCL, Air India, Shipping Corporation, Container Corporation, IDBI Bank, BEML, Pawan Hans, NeelachalIspat Nigam and several others in FY22.
  • If the Government is able to successfully bring an IPO of LIC, it will achieve a substantial part of the target in one go. The process will improve efficiency of LIC, bring in more transparency in processes and pricing of products.
  • Apart from IDBI Bank, Govt plans to privatize two PSU banks and one general insurance company.
  • Smaller banks which have not been merged till date and are likely candidates — Bank of India, Bank of Maharashtra, Central Bank of India, Indian Overseas Bank and UCO Bank.
    Disinvestment in key PSUs

Monetizing non-core assets

  • Asset monetization program for oil and gas pipelines of GAIL, HPCL and IOCL will be launched.
  • States will also be incentivized for divestment of idle assets. REITs and InVITS could be used more aggressively for monetizing idle public infrastructure or land.
  • NHAI operational toll roads, dedicated freight corridor assets, airports, transmission assets, gas pipelines, warehousing assets and sport stadiums could be monetized
  • A major reason for disinvestments not going through is lack of political will – it is quite un-populist to put employees of a PSU into hands of corporates. The difference in level of professionalism, accountability, ownership and productivity is huge.
  • Current Government is known for taking bold (sometimes un-populist) decisions– demonetization, GST, CAA, NRC, farm bill, etc. Hence, we do not see political will as an impediment.
  • The strategic sale will require amendments to law to enable M&A transactions of such companies. This is unlikely to be a hindrance.
  • The current market mood is very positive and FII / DII flows have been very encouraging. There is ample global liquidity, looking for good returns. With developing economies attracting good part of new capital, India is among the forefront of attracting such capital.
  • DIPAM is working on a new structure whereby incentives for PSU executives will be linked to factors such as Profitability, ROE/ROCE, Frequency/quantum of dividends, Market Cap, etc.
  • 10% stake sale in LIC once done, will release Rs. 800bn – Rs. 1tn, thus meeting half the divestment targets in one shot.

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Given these factors, we feel that there is a high probability of achieving the set divestment targets. If these targets are achieved, they will help bridge fiscal deficit to an extent, increase confidence of the Government in undertaking more such exercises in future and improve productivity of PSU companies.

Boost To Infrastructure

Traditional measures such as outlays towards roads, highways, ports, dedicated freight corridor and railways was stepped up. Additionally, a lot of emphasis was also laid on clean water, sanitation, healthcare and education.
Realizing that Government would have to do most of the heavy lifting, capital expenditure target was raised to Rs. 5.54tn for FY22, a growth of 26% yoy over FY21RE.

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National Monetization Pipeline (NMP)

  • Raise Rs. 120bn via NHAI & Power Grid through InvIT.
  • Railways to monetize DFC assets post commissioning
  • Monetization of operational road assets from NHAI, transmission assets from Powergrid Corporation, Oil & Gas pipelines from GAIL, IOCL, airports in Tier-II/III, warehousing assets.

Development Finance Institution (DFI)

  • Professionally managed DFI will provide funding for long term infrastructure projects.
    Capital base Rs. 200bn, lending target Rs. 5tn (3yrs)
  • Will be owned by GoI, enjoy comfort of Govt guarantees, bringing down funding cost.
    Commercial banks have been wary of lending to infrastructure projects given their long term payback structure.
  • DFI can fill this gap and serve as a key financier to NMP. It can also access global capital.

Clean Water & Sanitation

  • Jal Jeevan Mission (urban) launched in Budget for providing water supply to 4,378 urban local bodies, amounting to 28.6mn household tap connections.
  • Allocation of Rs. 1.4tn towards Urban Swachh Bharat Mission 2.0 to implement complete fecal-sludge management & waste-water treatment, source segregation of garbage, reduction in single-use plastics, & reduction in air pollution

Healthcare

  • Atma Nirbhar Swasth Bharat launched with outlay of Rs. 642bn for 6yr.
  • Scheme is intended to develop capacities of primary, secondary, tertiary care health systems, strengthen existing national institutions, to cater to detection & cure of new &emerging diseases. 
  • COVID vaccination program received allocation of Rs. 350bn
  • Total healthcare allocation for India has gone up from 1.2% of GDP 5yr ago to 1.5% of GDP in FY20.

Summing it up — A push to move up the “human value chain”

Consumer spending and sentiment is low, it makes sense for Govt to loosen its own purse.
Infrastructure building is a long term enabler – for generating employment, improving efficiencies, attracting long term money into the country, improving supply chains and many more. It has a domino effect on the economy;
one infrastructure project creates demand for cement, steel, power, mining, transportation, etc.
Add to this, factors such as a renewed focus on healthcare, water, sanitation and education and you have a potent recipe for boosting income levels and bettering quality of human life, thus moving up the human value chain.

Reforms Continue Unbated

One of the starkling feature of 2021 budget was the government’s intent to continue the reforms agenda. While there were plethora of initiatives, the notables were towards:

Domestic Manufacturing

For long, India has been a net importer of electronics, crude oil, automobiles and other
products. To change that, as part of AtmaNirbhar Bharat policy, FM has earmarked Rs 1.97 lakh crore over next 5yrs under Productivity-Linked Incentive (PLI) scheme covering 13 sectors.
This will attract global players to set up factories in India & export products to other countries.
The government will facilitate it by protective measures for the domestic industry by levying
customs duty on various products, including electronic items, compressors for refrigerators
and ACs, automobile parts such as electric motors and relays, etc.

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Scrappage Policy

  • Much-awaited scrapping policy for personal and commercial vehicles will be finalised soon also expected to boost demand for automobiles.
  • Personal vehicles over 20 years and commercial vehicles over 15 years will have to undergo a fitness test to run on roads.
  • The scrapped vehicle will further provide low-cost raw material to Auto OEMs, thereby reducing the cost of vehicles.
  • This will also help India in reducing environmental footprint and boost EV production.
    According to industry experts, there are around 37 lakh CV and 52 lakh PV eligible for scrappage assuming 1990 as the base year.
  • As a direct result of implementing the policy, up to 50,000 jobs and investments of around Rs 10,000 crore are expected to be generated.

FDI in Insurance

  • To attract foreign capital, the FDI limit in the insurance sector is hiked to 74% from 49%; this will allow foreign promoters to buy a stake in their Indian partners if required and provide the needed cash infusion.
  • The entry of a foreign partner will improve efficiencies, bring in greater transparency and align India’s insurance sector policies in line with global standards.
  • Along with other disinvestments announcements, one state-owned general insurance company is likely to get privatized and boost government revenue.

Bad Bank (Asset Reconstruction Company)

  • Introducing an entity to address the stressed assets banks through Asset Reconstruction Company (ARC)
    framework. Although the ownership of this entity is unclear, it is being understood as “Bad Bank” Approach.
    Significant boost for inefficient asset resolution in the financial system.
    Entity will purchase distressed assets from banks at a discount. Then it will attempt to recover maximum
    possible value through a professional approach.

This Budget had many “firsts” to itself with underlying objective of “Under-promise and over-deliver”.

Shoring up revenues without raising taxes

  • Corporate and personal taxes were left unchanged, to the relief of businesses & common people.
  • No imposition of COVID cess or wealth tax or rise in STT even though the government was in dire need of boosting its revenues.
  • GST collections hit all-time highs in Dec’20 & Jan’21, indicating sharp recovery post lockdown & better compliance. Corporate profitability has seen a huge turnaround from Q2FY21, which has improved fiscal situation dramatically
  • Experts expect even higher GST collections in the new calendar year as recovery gains pace.
  • While most Budgets tend to over-estimate revenues and receipts, this one preferred to err on the side of caution.

We will spend — Global rating agencies can go take a walk

India’s sovereign rating has for long been a matter of debate between the Government and global rating agencies. For long, global rating agencies have kept India at lowest investment grade, despite it being the 5th largest economy in the world.

Reasons that have been given for abysmally low ratings are – weakened growth outlook, high public debt, liquidity and NPA issues for NBFC sector, geo-political flare-ups and others.
The Economic Survey, an exercise whose results are tabled before the annual Budget, slammed rating agencies’ methodology that determines India’s ratings.

According to the Economy Survey, “While sovereign credit ratings do not reflect the Indian economy’s fundamentals, the noisy, opaque and biased credit ratings damage FPI flows. Sovereign credit ratings methodology must be amended to reflect economies’ ability and willingness to pay their debt obligations, by becoming more transparent and less subjective”.
“India’s willingness to pay is unquestionably demonstrated through its zero sovereign default history.

India’s ability to pay can be gauged not only by the extremely low foreign currency denominated debt of the sovereign but also by the comfortable size of its foreign exchange reserves that can pay for the short term debt of the private sector as well as the entire stock of India’s external debt including that of the private sector”

Traditionally running high fiscal deficits has been considered taboo by economists and rating agencies. However, the FM refused to toe the line and outlined that it will be high in near term and reduce it to 4.5% of GDP only by FY26.

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What’s Trending – The IPO boom in India

Primary markets, commonly referred to as IPO markets, are on a roll. Companies are hitting the street in a hurry and investors are lapping up IPOs like there’s no tomorrow! In CY2020, 15 companies raised nearly Rs. 27,000cr, more than twice the money raised in CY2019 from a similar number of IPOs. In the first month of CY2021, four companies have already raised more than Rs. 7,300cr. Almost all of these IPOs have received very high subscription figures, stellar debuts on bourses and in many cases have created significant wealth for investors
since their listing.

Summary of IPOs in CY20 and CY21

Company

Issue Close

Date

Issue Size

(Rs. Cr.)

Overall

Subscription (xs)

Issue Price

(Rs.)

Listing

Date

Listing day

Gains (%)

Current

Gains (%)

CY2020

 

 

 

 

 

 

 

SBI Cards and

Payment Services  

05-Mar-20

10,286

27

755

16-Mar-20

-10%

32%

Rossari Biotech  

15-Jul-20

496

3

425

23-Jul-20

75%

113%

Happiest Minds

Technologies  

09-Sep-20

702

151

166

17-Sep-20

123%

113%

Route Mobile  

11-Sep-20

600

73

350

21-Sep-20

86%

224%

Computer Age

Management Services  

23-Sep-20

2,244

47

1230

01-Oct-20

14%

48%

Chemcon Speciality

Chemicals  

23-Sep-20

318

149

340

01-Oct-20

72%

31%

Angel Broking  

24-Sep-20

600

4

306

05-Oct-20

-10%

15%

Mazagon Dock

Shipbuilders  

01-Oct-20

444

157

145

12-Oct-20

19%

49%

Likhitha Infrastructure  

07-Oct-20

61

10

120

15-Oct-20

14%

71%

UTI Asset

Management Co

01-Oct-20

2,160

2

554

12-Oct-20

-14%

3%

Equitas Small

Finance Bank  

22-Oct-20

518

2

33

02-Nov-20

-1%

30%

Gland Pharma  

11-Nov-20

6,480

2

1500

20-Nov-20

21%

43%

Burger King India  

04-Dec-20

797

157

60

14-Dec-20

131%

138%

Mrs. Bectors

Food Specialities  

17-Dec-20

541

198

288

24-Dec-20

107%

44%

Antony Waste

Handling Cell  

23-Dec-20

300

4

315

01-Jan-21

29%

-3%

TOTAL

 

26,546

 

 

 

 

 

 

 

  

 

 

 

 

CY2021 till date

 

  

 

 

 

 

Indian Railway

Finance Corporation  

20-Jan-21

4,633

3.49

26

29-Jan-21

-4%

-5%

Indigo Paints  

22-Jan-21

1,176

117.02

1490

02-Feb-21

109%

102%

Home First Finance

Co India  

25-Jan-21

1,154

26.66

518

03-Feb-21

NA

NA

Stove Kraft  

28-Jan-21

413

18.03

385

To be listed

NA

NA

TOTAL

 

7,376

 

 

 

 

 

  1. Growing share of participation by Retail & HNI

During lockdown months, a flurry of retail investors and first time traders entered the capital markets. They were lured by low market levels in March-April, 2020 and also traction from discount brokers. As per SEBI data, demat accounts grew from 39.6mn in January, 2021 to 47.6mn in October, 2020, rise of 20% in as less as 10 months, despite COVID times.

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Source: SEBI Data

  1. Eeny meeny miny moe, Equities is the way to go!!

The scenario in India is that there are hardly any investing options that are giving good returns. FD rate for SBI is a measly 4.40% for 1yr, real estate rates have hardly moved over the past few years, PPF rates have come down 100bps over past five years to 7.10%. BitCoin market is beyond comprehension for most common investors. Gold is purchased in India more in physical form rather than E-Gold. So the most obvious choice is equity markets. 

Asset

Returns in CY2020 (%)

Bank Fixed Deposits

6.25%

Equity – Large Cap

15.46%

Equity — Mid-Cap

24.30%

Equity — Small Cap

30.41%

Short Duration Bond Funds

9.73%

Long Duration Bond Funds

12.53%

Liquid Funds

4.16%

International Funds

19.08%

Gold

27.32%

Real Estate — Commercial

8.25%

Real Estate — Residential

2.00%

Source: Moneycontrol.com

  1. Pent up demand

India’s economy had been slowing down even before the pandemic hit us. This led to lackluster markets in 2019 and early 2020 with hardly any appetite for fresh equity. Hence, companies were waiting on the sidelines to raise money. As markets surged post April, 20 and continued climbing higher, companies saw this as a right opportunity to hit the primary market

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  1. Market rally typically followed by spurt in IPOs

A booming stock market is usually followed by slew of IPOs. General exuberance in markets often makes IPOs deliver stellar returns on the listing day and sometime thereafter. A word of caution though, this exuberance lasts only so long as markets remain buoyant and fizzles out thereafter.

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  1. Cheap money and liquidity

The world is flush with liquidity as global central banks have reduced rates in order to keep economies afloat in a pandemic-affected world. FII data sourced from website Moneycontrol also vindicates our claim – FIIs have been net sellers in equities only once between April, 2020 and January, 2021. Devoid of any returns in the developed world, markets such as India offer great returns to FIIs.

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Source: Moneycontrol.com

       6. IPO frenzy globally

In China, there were 30 IPOs which raised a total of $11.7bn in 2020, highest raised since 2014. Hong Kong raised HKD 397bn in 2020 vs HKD 315bn in 2019, rise of 26% yoy
There were 480 IPOs on the US stock market in 2020, an all-time record. This is +106% more than 2019 (233 IPOs) and 20% higher than the previous record IPO year of 2000, which had 397.

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