Equity Strategy: Covid wave likely to affect the recovery

OWT IT Svcs, UWT Fin. Other top picks – RIL, Tata Steel, Concor, PGRD, GPL, Colgate, Dr Reddy’s & Maruti.

Jefferies recovery tracker (JRT) averaged 102% in Mar’21, -1ppt MoM, partly as urban activity tapered down somewhat on rising COVID cases. Localised lockdowns are getting more stringent, and we believe near term economic activity trajectory could dip somewhat. We have turned defensive to build in near term lockdown risks. OWT IT Svcs, UWT Fin. Other top picks – RIL, Tata Steel, Concor, PGRD, GPL, Colgate, Dr Reddy’s & Maruti.

Activity levels show limited impact in March: We track 20 economic high-frequency activity indicators to formulate our India economic activity indicator. March month activities averaged 102%, -1ppt MoM. We note that the recent week (ending 4th April) has shown significant activity dip but an accurate diagnosis of the dip is limited by a couple of public holidays.

Some sluggishness in urban/metro activity: The activity sluggishness MoM in March was on account of some weakness in urban indicators, which partly reflects the impact of rising COVID cases and some restrictions. Congestion levels declined 13ppt to 80% and travel & hotel bookings were -6ppt MoM. Workplace mobility and transit data was flat. Real estate activity levels continued their rising trend. Suburban rail traffic also improved MoM by 5ppt.

Broader data points maintain trend: The low base kicking in for several data points (national lockdown from late Mar20) makes direct data comparison difficult. A look at underlying trend (2 year CAGR proxy) makes us believe that broader economic activity in March, was at levels similar to February. Electricity consumption was flattish (2 year CAGR basis) at +6%. Rail freight (2 year CAGR) was +4% vs. +6% in Feb. Petrol consumption was +5% y-o-y in Mar’21 vs. Mar’19. Diesel consumption for same period was -5%. Domestic demand indicator imports (ex petro, ex Gold, 2 year CAGR) grew 2% y-o-y in Mar vs. 4% pace in last month. Auto sales data from OEMs shows PV/2W sales up 4%/2% YoY on 2 year CAGR basis. The e-way bill generation was +14% y-o-y (2 year CAGR) vs. 13% in Feb.

Real estate, construction activity higher: Property registrations in Mumbai and Delhi were at multi-year highs. Steel consumption was +40% y-o-y in March but down on 2 year basis.

Rising tax collection: GST collections for March (Feb activity) were up 27% y-o-y. This prompted govt. to disburse higher than budgeted funds to states in Mar21.

COVID trends worrying: COVID cases addition run-rate has now exceeded 2020 peak. Deaths are also rising (~5x from low); while still less than half the previous peak, could spike much higher. COVID surge in Maharashtra has already prompted a restrictive lock-down and several other states are also incrementally restricting economic activity. Vaccination pace has risen to c.3m/ day. At about 20% of 45+ population getting at least 1 dose, India may have to wait a couple of months before resuming its recovery trajectory.

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