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MOSL: BULLS & BEARS (August 2017)-India Valuations Handbook — Markets continue upward momentum-highest MoM rise in 16 months

​BULLS & BEARS (August 2017): India Valuations Handbook — Markets continue upward momentum; highest MoM rise in 16 months, Consumer underperforms

Strategy: Markets continue upward momentum

Highest monthly rise in 16 months: The Nifty rallied 5.8% in July, the highest monthly return in 16 months. The key drivers were: good progress of the monsoon, smooth GST implementation, and continued liquidity inflow. Midcaps (+4.4% in July) underperformed the Nifty, but the valuation premium v/s large caps remained stable at 14% (7% in May). July witnessed inflow of USD0.4b from FIIs and USD1.8b from domestic MFs. In YTDCY17, India has received MF inflows of USD8.1b, more than full year inflows of CY16 (USD7.1b). FII inflows for YTDCY17 stand at USD8.7b, more than the cumulative CY15 and CY16 inflows of USD6.3b. Currency remains stable at INR63-65/USD, benefiting from strong flows and stronger macros. RBI has announced a 25bp repo rate cut in its meeting yesterday (August 02, 2017), acknowledging the muted inflation trends and normal monsoons. Politically, NDA got a major boost in July, with Bihar Chief Minister, Mr Nitish Kumar breaking alliance with RJD and forming a new government in alliance with BJP. This augurs well from the Rajya Sabha arithmetic perspective, as it bolsters the government’s numbers in the Upper House.

No big surprises in 1QFY18 results yet; GST implementation creates some volatility: The government has implemented GST from July 01, 2017, and so far, it has been a smooth exercise, barring minor hiccups. The de-stocking ahead of GST has impacted volumes in sectors like Consumer Staples/Durables/Autos/NBFCs, but this was anticipated. The 1QFY18 earnings season has been in line so far, with 101 MOSL coverage companies having declared their results. Sales, EBITDA and PAT have grown at 8.7%, 4.7% and 0.7% against expectations of 7.5%, 6.2% and 4.3%, respectively. However, earnings downgrades continue, with 11/33 companies seeing earnings upgrade/downgrade of 5%+, so far. Nonetheless, our Nifty FY18 EPS forecast remains unchanged at INR496.