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Corporate Activity Rebounds as Economic Activity Picks Up

Author: The Finapolis Network/Friday, February 26, 2021/Categories: Exclusive

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Corporate Activity Rebounds as Economic Activity Picks Up

The economic activity rebound in third quarter of 2020-21 is boosting investor sentiment as the earnings forecast is pegged at 24 per cent for the fiscal. ICICI Direct in its latest report said that Nifty earnings may grow at a compound annual growth rate (CAGR) of 24.2 per cent over FY21-23.
In the report, ICICI attributed the reasons for the growth to recovery in economic activity and festive season. 
The report added that "going forward, we expect Nifty earnings to grow at 24.2 per cent CAGR over FY21E-23E. Using a bottom up approach and giving discount to target weighted average PE, we now value the Nifty at 16,300 i.e. 22x P/E on FY23E EPS of Rs 740 with corresponding Sensex target at 54,600." 
The third quarter (Q3 of FY21) earnings recorded significant improvement and beyond previous forecasts as corporates continue to benefit from lower raw material costs and realised leaner cost structures. 
At the index level, excluding the BFSI (banking and financial industries and insurance) space, in Q3FY21, net sales declined 2.5 per cent YoY, primarily driven by double digit topline decline in the oil and gas domain amid muted crude prices. Excluding oil and gas and banking space, Nifty topline posted growth of 10 per cent YoY.
Auto sector results were robust nearly all across the board particularly in relation to margins, amid 10.5 per cent YoY growth in total sales volume at 72.8 lakh units, said the ICICI Direct report.
In the capital goods domain, execution picked up pace sequentially with key highlight for the quarter being robust order inflows. In the FMCG space, strong growth momentum continued in Q3FY21 led by robust growth in rural regions supported by significant increase in government spends post pandemic, said ICICI in the report.
Despite Demand Renewal, Cement Prices Remain Sluggish
The demand for cement has been picking up thanks to the construction activity revival and latest policy push in the Budget-2021 for infrastructure projects across India. However, the cement prices are still muted, observes Motilal Oswal Financial Services (MOFSL). Despite the overall demand in South India remained sluggish on a YoY basis, Telangana and Andhra Pradesh recorded a strong uptick, while construction activity in Maharashtra is on the rise for the first time since the pandemic.
MOFSL in a latest report said: "The seasonal uptick in demand is playing out, with volumes bouncing back strongly from the weakness seen in the first few weeks of January.  Prices marginally rose 1-2 per cent on a MoM basis in northern and western states, while the average pan-India price is down two per cent QoQ thus far in Q4FY21." 
"Cost inflation is also a concern in the near term as petcoke, coal, and diesel prices are up 71 per cent, four per cent, and 26 per cent YoY, respectively. Therefore, margins may decline sequentially for the industry, but they should still be higher YoY. EBITDA is expected to increase over 20 per cent YoY in 4QFY21, driven by 18 per cent YoY growth in volumes," elaborates MOFSL in the report. 
The off-take has been strong in February, led by continued healthy demand in east, north, central India and revival in western region. However, it has remained weak in the southern region.
"Demand in East has been particularly strong, supported by pre-election spending in West Bengal and strong industrial or infra demand in Odisha. Demand in North and Central has also improved in February - supported by a receding winter season, which has improved the pace of construction work," said MOFSL.
Furthermore, the report said demand in the western region has rebounded strongly, led by recovery in urban real estate and construction.
Rs4-Lakh Cr Cost Overrun In 448 Infra Projects 
A latest report from Union Ministry of Statistics and Programme Implementation revealed that as many as 448 central sector infrastructure projects reported a cost overrun of over Rs 4.02 lakh crore as of February 21, 2021. The monthly report stated  that 539 projects are running behind schedule.
The ministry in the latest report elaborated that "total original cost of implementation of the 1,739 projects was Rs 22,18,210.29 crore and their anticipated completion cost is likely to be Rs 26,20,618.44 crore, which reflects overall cost overruns of Rs 4,02,408.15 crore (18.14 per cent of original cost). The expenditure incurred on these projects till January 2021 is over Rs 12.29 lakh crore, which is 46.92 per cent of the anticipated cost of the projects."
"Out of the 1,739 projects, 12 projects are ahead of schedule, 247 are on schedule, 539 are delayed, 448 projects reported cost overrun and 209 projects reported both time and cost overrun with respect to their original project implementation schedules," it said.
The report, however, noted that the number of delayed projects decreases to 401 if delay is calculated on the basis of latest schedule of completion. Further, for 941 projects neither the year of commissioning nor the tentative gestation period has been reported.


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