Is the post COVID recovery a blip?

Highlights
- IT and telecom were the expected winners from Q2 FY21 earnings season
- Cement was a positive surprise along with certain discretionary consumption categories
- Premium consumption still on a tentative wicket
- Auto benefitting from preference for personal mobility

- Significant improvement in collection efficiency of banks points to broad-based normalization of activities

In the run-up to the Q2 FY21 earning season, we had expected the beneficiaries of the new normal like the technology and telecom sectors to post a strong show and almost every other company to report a huge sequential improvement as the April-June quarter was a washout for most businesses impacted by the lockdown.

The early trends from Q2 were more or less on expected lines with most large technology companies surpassing our optimistic assumptions, thanks to a significant acceleration in investment by enterprises on technology in the areas of cloud and digital with operational efficiencies and cost reduction propelling margins.

The surprise winner

We were pleasantly surprised when besides the usual suspects, purely domestic demand driven cement companies surprised the Street positively. Contrary to expectations of no growth, the three leading pan India players - UltraTech, ACC and Ambuja - reported YoY (year-on-year) volume growth and their adept management of cost resulted in enviable margins. Housing-led demand reportedly made a strong comeback while infrastructure activities were showing early signs of a pick-up.

Is the consumption mojo back?

If this was somewhat of an aberration, the entire consumption pack virtually left no doubts that this recovery cannot be just brushed aside as pent-up demand from the June quarter. Staples, that was already in a secured spot amid the lockdown, strengthened its position with genuine demand revival. Many frontline players like Britannia, Colgate and Marico reported strong YoY volume growth. Not only staples, discretionary categories had a genuine revival story to share as well.

Titan, the true blue discretionary consumption play, saw a near normal September with the flagship jewellery segment returning to near pre-COVID levels. The same positive vibes came from the earnings report of Asian Paints that witnessed YoY double digit growth in decorative paints volume.

Quasi discretionary categories like electricals – fans, lighting, fast moving electrical goods - also threw a positive surprise as seen from the numbers of Havells, Crompton Consumers and Polycab with YoY growth on the back of demand coming from the retail segment although institutional business was still weak.

After a quarter of austerity, consumers said cheers in Q2 as RadicoKhaitan saw a YoY growth in its volumes.

Are we back to the pre-COVID days? Not entirely. While there is no permanent destruction in demand as is evident from the report card of consumption companies, the economy is still far from firing. Check this: Hindustan Unilever, again a bellwether consumption company, saw its FMCG category grow but premium discretionary items saw a huge decline resulting in overall tepid growth in volumes. Even for Asian Paints, the growth was led by the economy category with premium taking a back seat. So while consumers are out of the phase of fear, they are yet not optimistic enough to splurge.

The post-COVID commuters

COVID has unleashed a change in consumer behaviour at all levels and not just in the use of e-commerce as a preferred mode of shopping. The concern over avoiding crowds has resulted in a strong surge in demand for two-wheelers, the cheapest mode of personal mobility as well as passenger cars. This is reflected in the positive YoY volume growth of Bajaj Auto, Hero, Maruti and also a stellar show of Tata Motor’s passenger vehicle business. However, cautious commuters are shunning public transport. That explains the decline in three wheeler sales in recent times. We expect a positive rub off on the ancillary segment from the automotive revival.

Needless to mention, the very good monsoons, encouraging kharif sowing, rural-specific fiscal sops and record water levels have all added to the positive sentiment especially in the rural areas.

Will investment follow suit?

Will the positivity in consumption reflect in the companies riding on the capital expenditure (investment demand) theme – not entirely, but the early signs are heartening, nevertheless.

Steel companies like JSW that managed to keep its head above water in Q1 with exports, saw strong traction from domestic market in Q2 with volumes growing YoY. Similar strength was seen in the demand for zinc as well.

Pure play investment themes are not yet out of the woods, however. Larsen & Toubro’s flagship EPC business continued to report a YoY decline, although a much improved show compared to Q1 and the company dispelled concerns about labour availability impacting execution.

Industrial activity is gradually picking up as Cummins India, a company that has its pulse on industrial revival is seeing early traction from diverse areas. Consumer facing manufacturers like Dixon are witnessing strong demand traction, suggestive of demand returning to pre-COVID levels in several pockets.

However, a full blown revival in investment may not be on the horizon yet.

Are the lenders sensing a return to normalcy?

A discussion on revival is incomplete without a key constituent – the lenders, who undoubtedly have their ears on the ground. While the moratorium, followed by the Supreme Court’s order on non-classification of NPAs, has largely masked the reported NPA picture, the commentary from banks is insightful. Most large banks like HDFC Bank, Kotak Bank, Axis Bank, ICICI Bank or IndusInd Bank have seen collection efficiency steadily improving with September figures upwards of 95 percent barring a few minuscule troubled pockets. Even large NBFCs having significant coverage like M&M Finance or Shriram are witnessing similar collection efficiency, a clear indication that the pain so far is much less than was initially feared.

While these disaggregate data points are directionally pointing at a much firmer recovery than anticipated, there will be wide variations. Not all categories are uniformly participating and not all companies equally benefitting. Note that the earnings report card so far is that of better-managed, savvy players. Hence, investors will have to continue to tread with caution and evaluate the merit of individual business.