The government has extended the current
lockdown by another 19 days to May 3 to contain the outbreak of Covid-19. However, it has been eased in certain districts from April 20, depending on the situation. Several districts have very few cases currently, but the government is worried about the potential spread of
Covid-19 outbreak to unaffected areas and would like to monitor the situation for a few more days.
An analysis on district-level data (albeit dated) suggests Covid-19 cases are quite concentrated with 18 out of the 720 districts accounting for more than 50 per cent of the cases. If we observe the number of cases by ‘affected’ districts, and the distribution of India’s population by ‘affected’ districts, it is clear that the Covid-19 cases are largely confined to urban centres.
The government may need to increase testing in districts with nil or fewer cases to determine the real situation in those districts and extend or relax the lockdown in those districts depending on the outcome of testing.
The government’s decision to extend the lockdown to early May will result in further downgrades to FY2021 GDP and FY2021 earnings estimates. Earnings estimates for FY2021-22 have already seen sharp cuts in recent weeks. Currently, the projected net profits of Nifty50 Index is expected to grow 9.6 per cent in FY2021 and 23 per cent in FY2022. However, note that (1) growing uncertainty around the ‘reopening’ of the economy (complete, phased, erratic) and (2) lack of meaningful fiscal support from the government (so far) may create risk of further downgrades to FY2021 earnings estimates across sectors. However, FY2022E earnings numbers will be relatively unaffected except for the financial sector (credit costs will be high in FY2022E too, if there is a spike in bad loans in FY2021).
The economy and corporate earnings will recover gradually from H1FY21 and broadly ‘normalise’ in FY2022. As such, market valuations are quite attractive on a historical basis and so are earning yields even assuming further cuts to FY2021E earnings. Near-term news on new cases, uncertainty over lockdown and government stimulus may keep the markets volatile. However, there is comfort in attractive reward-risk balance in both largecap and midcap stocks.