Inflation Delivers a ‘Below the Belt Hit
If we have to sum up the market action for the truncated in just a single line, it would be: “If you went short in the short week you would perhaps have made some sort of money” as Nifty ended the week down by 1.74 per cent and concluded its two-week winning streak. The main culprit of the fall was the inflationary monster which is showing no signs of vanishing too soon. US, Europe and Japan have all reported high inflation. In fact, the global economy is grappling with increased prices, leading to fears of an economic recession. The Russia-Ukraine war coupled with pandemic-triggered shutdowns in China is elevating the risks of a recession
India, needless to say, is not immune to global inflation pressures. India’s retail inflation, as measured by the Consumer Price Index (CPI), in the month of March jumped to its 17-month high of 6.95 per cent. Inflation in the food basket was 7.68 per cent in March, a significant rise from 5.85 per cent in the preceding month. Furthermore, food prices are expected to remain elevated amid supply chain problems. The jump in CPI data to a 17-month high is a testament of what Indian consumers were complaining about recently.
For example, a report claims that the price of lemon, which is a staple during summers, has skyrocketed to anywhere between Rs 300 to Rs 350 per kg in the country’s capital. Meanwhile, in the US, inflation surged to a new four-decade high of 8.5 per cent in March from the same month a year ago. Similar was the case in the UK and Japan. Amidst surging inflation, once again the echo of the Reserve Bank of India (RBI) hiking the interest rate is firming up and its quite likely that we may see it hiking it by 25 bps as the inflation, which is close to 7 per cent, is above the central bank’s comfort zone of 4 per cent with a margin of 2 per cent on either side for the third straight month.
Shifting our focus from inflation to the earning season, the quarterly result season has begun with IT bellwether TCS announcing its QFY22 numbers followed by Infosys. Earnings from the former were in line with expectations and both rupee revenue and the margins marched in tune with what the street was anticipating. Among some of the good internals is the fact that the company’s order inflow this quarter saw a big jump to USD 11.3 billion in Q4FY22 as compared to USD 7.6 billion of order wins in the prior quarter. Thus, there is a nearly 49 per cent jump in the order book. Interestingly, this is the highest ever total contract wins for the company in the current quarter and it’s indicative of the demand environment that we are currently in.
On other hand, Infosys disappointed the street as revenue and margins for Q4 have come in lower than the consensus. However, one factor pertaining to both the IT giants that was quite disturbing was the attrition rate. TCS reported an attrition rate of 17.4 per cent while Infosys reported an attrition rate of 27.7 per cent for the quarter ended March 2022. Also, on April 16, HDFC Bank would report its earnings and hence on Monday the markets would be reacting to its numbers which together holds around 17 per cent weightage in the Nifty 50 index.
The quarterly earnings’ season should be watched closely because of the following reasons: a) the management commentary for FY23 would be important to understand the impact of global growth, inflation and geopolitical conditions on Indian businesses. By now, most of the corporates would have evaluated the impact on their respective businesses and their assessment would be reflected in their guidance for FY23 and b) the earnings’ estimate of many analysts for FY 2023- 2024 did not factor in developments such as the geopolitical situation, inflation, etc. The latest results may see analysts rationalising their forecasts and this shall give a more realistic picture of the current valuations. So, it’s time to be a bit cautious as the market is a little evenly, not just domestically but perhaps globally too. Fresh commitments in stocks should be taken with good analysis and reasoning only.
