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02 Nov 2020 by Jigna Shah
Correction Ahead In Indian Stock Markets? 5 Reasons Why Current Weakness May Be Short-lived - Research & Ranking

With the second wave of Covid 19 affecting USA and Europe in the month of October, we have seen a spike in market volatility and uncertainty in domestic markets. Several investors are asking whether it is going to be a repeat of the March 2020 situation when Indian stock markets witnessed a significant correction.

Before we talk about the topic, let's look at the Q2FY21 results, which have been so far above expectations. 

135 companies results so far- BSE 500

Rs (in crores)

Q2FY21

Q1FY21

Q2FY20

Year on year
(YoY) change

Quarter on quarter
(QoQ) change

Sales

556035

453115

546578

2%

23%

EBITDA

148215

119555

107855

37%

24%

EBITDA %

35.2

27.0

32.7

 

 

PAT

70667

31456

63351

12%

125%


Key Highlights Of The Above:

1. Q2FY21 performance better than Q2FY20, YoY growth surpassing even the optimistic estimates

The impact from sectors hit the most was covered by sectors that benefited. The most optimistic thing - YoY growth for Q2FY21 vis-à-vis Q2FY20 is 12%. The YoY growth is much beyond than any most optimistic analyst's estimates, thus suggesting strong rebound in economic activities. This is an important growth parameter to look at apart from QoQ growth numbers.

2. Normalisation of activity continues in October

Commercial Vehicles (CV) sales growth, e-way bills generated, diesel consumption and toll collection suggest on-ground activities are 90-110% of Sept-Oct levels last year. In Oct, most auto companies are expected to post the highest monthly sales in the last 12-15 months.

3. US elections will lead to volatility but not permanent damage

In the past 6 elections, US markets (S&P 500) has corrected 1% a month before elections but rose by 11% in the subsequent 12 months. In the last elections of 2016, it corrected 4% a month before and then rose 24% in the next 12 months.

4. Second wave in Europe, US elections & pending stimulus leading to global weakness; however India steady

  • India's situation is improving with reduction in per day Covid cases from 98000 to <50000, while US & Europe cases have more than doubled.
  • Business resumption, ramp up in testing rates, awareness campaigns has meant India is better prepared. Testimony to this is current Bihar's elections, something unthinkable till June'20.
  1. Positive news on the vaccine front is slightly delayed but likely anytime in next 2-3 months

 

FY20

FY21e

FY22e

Nifty EPS

490

460

630

Growth

2%

-6%

37%


Based on long term historical average PE of 18-22x, the 1-year Nifty fair price on FY22 EPS is 11,400-13,800.

Way Ahead - What Indian Stock Market Investors Should Do?

As you can see above, the current fall of 2-3% in the Indian stock market should not be a reason to worry at all. Indian economy is well-placed and has only become more resilient with time.

Considering the robust health of our economy, we suggest using any dip or weakness in the stock market to accumulate quality companies.

To invest in well-diversfied portfolio of 20-25 quality stocks click here.

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