Why India’s stock markets are

decoupled from the economic

reality
One, markets by their khaasiyat — their very nature
— are decoupled from the economy. They are either
forward looking or despondent. The Bombay Stock
Exchange Sensitive Index (BSE Sensex) bottomed
out a shade below 26,000 a day before the
lockdown commenced in March 2020.
Why are India’s stock markets decoupled from its economic reality?’
That’s what the person who commissioned me to write this piece asked.
This, then, is my answer. (‘Don’t exceed 850 words,’ he warned.)

One, markets by their khaasiyat — their very nature — are decoupled from
the economy. They are either forward looking or despondent. The Bombay
Stock Exchange Sensitive Index (BSE Sensex) bottomed out a shade
below 26,000 a day before the lockdown commenced in March 2020.

Thereafter, while we were extrapolating the pain to the economy, the

market was doing something else — it subtly began its climb to doubling
in less than a year. It was seeing things we never did. Ergo, it was
technically decoupled.

Greatfully Repaying Debt

Two, a number of companies are restructuring. Immediately after
Tata Steel
NSE -0.65 % announced its annual results, the next most important theme
to come out of the company was a projected Rs 30,000 crore debt
reduction.
Steel Authority of India
NSE -0.39 % (SAIL) announced its annual performance, and immediately
told the market that it repaid Rs 16,150 crore in the fourth quarter. These
are the kind of numbers the company would have done in five years.

I see this phenomenon across a number of my clients. (I write annual

reports for a living.) A prominent Delhi-based tyre brand that had become
synonymous with ‘high debt-equity ratio’ repaid more than Rs 1,000 crore
in one quarter. A mid-sized steel company in Raipur has repaid all its
longterm debt two years ahead of schedule. A Kolkata-originated non-
banking financial company (NBFC), which was feared to stagnate around
Rs 15,000 crore of assets under management (AUM), brought in more
than Rs 3,000 crore in net worth that has rewritten its destiny in one
stroke.

India’s largest interior infrastructure company from Kolkata announced a

new plant that will be funded through accruals — so presumably will never
take debt to grow. India’s largest bead wire manufacturer from Indore has
so much cash on its books that it announced a new manufacturing facility
out of earnings (no debt).

I see this reality in a number of places: companies are restructuring, debt

is going out of balance sheets, and financials are doing a ramp walk. This
is being priced into equities in the anticipation that higher margins will
start kicking in from the current financial year.

Three, some of the decoupling is originating from the government’s long

term policy. The National Biofuels Policy is a good instance. Sugar
companies with distilleries are being re-priced each time the prime
minister whispers the word ‘ethanol’. The rebalancing is still work-in-
progress. Some sugar companies will increase their ethanol capacity no
earlier than the 2022-23 ethanol year. But the market has convinced itself
that this has already happened and the money is lying in a corner waiting
to be collected.
For all those who feel that this is shamelessly speculative, I present a
reverse argument. GoI intends to blend petrol with 20% ethanol by 2025.
Which means that the pressure is now on sugar companies to produce as
much as possible (as distinct from the pressure on them to find a market).
Besides, there is a strain of thought that as sugar manufacturers evolve
into agri-based energy companies, they will migrate into environmental,
social and governance (ESG)-centric portfolios for the really long term
(over 10 years).

So, what difference does it make if one has to buy a sugar stock that has
more than doubled in just two months because, in the long term, it won’t
really matter? Decoupled? Possibly. Coupled? More likely, considering the
time horizon of one’s investment.

Greased Castors, Anyone?

Four, a number of analysts are seeing the ‘decoupling’ as one of the first
signs of the world exploring a Plan B to China. The result is a greater
interest among global companies to prospect Indian companies for
products supply, and probable collaborations. Now, this could be
compelling.

From the perspective of the next few quarters, the market could appear
overpriced based on a historical measure that we have considered sacred
for decades. But what if India were to emerge as ‘the next China’, create
wealth faster than ever since Independence? And even if that added the
next $2.3 trillion in only the next six years (three years beyond what the
PM had once predicted), it could still be the fastest quantum accretion to
GDP in the country’s existence.

Five, GST benefits have begun to become evident for large organised
companies. One of the most prominent innerwear companies in India from
Kolkata indicated it could get finished products to dealer stores faster
than unorganised competitors during the lockdown, a lead it maintained
through the rest of the year (and promptly deleveraged). A Delhi laminates
client indicated it was the first to be up and running in its sector after the
government provided permission, carving away market share over
unorganised players.

This K-shaped recovery indicates that, perhaps, the organised companies

are growing faster. Since the latter are represented on the exchange and
indices, their growth is strengthening the indices while those looking at
SMEs are likely to ask, ‘Is the economy really buoyant?’

That finishes my argument. And I haven’t yet used ammunition like ‘dollar
weakness’, ‘retail participation’, ‘bonds buying’, ‘Zerodha impact’, ‘money
printing’, ‘interest rates’, ‘digitalisation’ and ‘IPOs’. Some other time.