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MOSL: BULLS & BEARS (April 2018)-India Valuations Handbook — It’s a tale of caution and opportunity now-apt stock picking to be more rewarding

BULLS & BEARS (April 2018): India Valuations Handbook — It’s a tale of caution and opportunity now; apt stock picking to be more rewarding

 

Strategy: It’s a tale of caution and opportunity now; apt stock picking to be more rewarding

• Last two months take the sheen off Nifty: After sliding 4.9% in February, Nifty continued weakening further in March (-3.6%). Notably, ending FY18 at 10,114 (+10.2%), the index wiped out majority of yearly gains (until January 2018, the Nifty was up 20.2% YTD FY18), led by escalating volatility on the back of unsupportive global and domestic events (concerns around global interest rate tightening, potential trade conflict, and domestic political uncertainty after the BJP’s muted show in the recent by-polls). Nevertheless, investors found some comfort from the RBI’s 1HFY19 borrowing calendar (which soothed nerves in the bond markets) and G-sec yields coming off from the high of 7.8% to 7.35% now. In March, FII and DII flows stood at USD2.1b and USD1b, respectively. For FY18, DII bought USD 17.7b, almost ~4x of FY17, while FII flows stood at USD3.2b, less than 50% of FY17 flows. Midcaps (-4.6% in March) underperformed the Nifty in March and FY18 (9% returns v/s 10% returns by Nifty). Note that midcaps still command a rich premium of 73% v/s large caps.
• Expect volatility to remain high; macro data point toward gradual demand uptick: After a relatively calm CY17, we believe volatility will remain elevated in CY18 – especially given the market concerns about a potential global trade war after the US initiated tariff actions on imports from certain countries. Moreover, the BJP’s dismal performance in the recent by-polls has introduced an element of uncertainty, especially with the General Elections around the corner next year. In our view, markets will continue to closely monitor the outcome of the elections in a few key states in CY18. Nevertheless, the markets have something to cheer about with evidence of demand revival in selected pockets (IIP data, core sector growth, monthly vehicle sales data, fuel consumption data and GDP print, which all point toward bottoming out of macros). Encouragingly, our recently released thematic report on capex talks about green shoots of capex recovery in sectors such as steel, cement and refinery. Our economist, Nikhil Gupta, in a note released yesterday, revised up the FY19 GDP/GVA growth expectations by 10/30bp to 6.9%/6.7% and lowered the FY19 CPI inflation forecast by 70bp to 4.4%.