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MOSL: BULLS & BEARS (August 2019)-India Valuations Handbook — When it rains, it pours! Markets drown further deep, FIIs flood out

BULLS & BEARS (August 2019): India Valuations Handbook — When it rains, it pours! Markets drown further deep, FIIs flood out

 

Strategy: When it rains, it pours! Markets drown further deep, FIIs flood out

• The pain continues: The Nifty skid 5.7% MoM in Jul’19 after a 1.1% decline in the previous month. Notably, foreign fund exodus (USD1.9b) was the highest since Oct’18 as the budget proposal on super-rich taxation and FPI surcharge marred sentiment. DII inflows, however, spiked to USD3b – the highest since Oct’18. While the 10-year G-Sec yields corrected to 6.3-6.4% on the back of the government’s proposal to tap overseas markets for borrowing, it did not provide much respite to the markets. Mid-caps underperformed large-caps with a 9.8% decline in the month. On a 12-month basis, mid-cap returns (-16%) lagged the Nifty’s returns (-2%). The Nifty Midcap100 P/E ratio has corrected from 25.6x in Aug’18 to 14x currently. Mid-cap premium to the Nifty (14% in Aug’18) has also turned into a discount of 23% in Jul’19.
• Budget and weak corporate earnings exacerbate the downfall: Investor sentiment was impacted by the lack of fiscal stimulus in the budget and also the proposal to levy surcharge on FPI. Moreover, earnings delivery has been weak so far in 1QFY20, with downgrades outweighing upgrades by 3:1. Nifty earnings are up 12% v/s expectations of 19.7% for 33 companies that have declared their numbers. For the MOSL universe, earnings are up 10.8% v/s expectations of 15.6% for the 121 companies that have announced their numbers. As at 31st July, we cut our Nifty EPS estimates by 1% to INR576 for FY20. Consumption slowdown in Automobiles, FMCG and Cement, and the mixed asset quality outlook in Banks have raised earnings downgrade prospects for the rest of FY20.
• India worst performer amongst global markets: Among the key global markets, the UK (+2%), the US, Japan, Taiwan, Brazil, Russia and Indonesia (all up 1%) ended higher in local currency terms. On the other hand, India (-6%), Korea (-5%), MSCI EM (-2%) and China (-2%) were amongst the worst performers in the month. Over the last 12 months, MSCI India and MSCI EM are both down by 5%. Notably, over the last 10 years, MSCI India outperformed MSCI EM by 80%. MSCI India’s P/E is at a premium of 80% to MSCI EM’s P/E, above its historical average premium of 49%.
• Sectoral trends for July – Technology the sole sector with positive returns: Autos (-14%), Metals (-13%), Capital Goods (-12%), Oil (-11%) and PSU Banks (-11%) were the key laggards in July. Technology (+1%) was the sole gainer in the month. Asian Paints (+12%), Infosys (+8%), Zee Ent (+7%), Sun Pharma (+6%) and Kotak Mahindra Bank (+3%) were the top performers on an MoM basis. Titan (-21%), Coal India (-19%), GAIL (-17%), ONGC (-17%) and Bajaj Finserv (-17%) were the top laggards. In this edition of ‘Bulls & Bears,’ we take a deep-dive into the valuation metrics of the Automobile sector.