MOSL: BULLS & BEARS (December 2017)-India Valuations Handbook — Consolidation in November-Earnings – a reason to cheer

​BULLS & BEARS (December 2017): India Valuations Handbook — Consolidation in November; Earnings – a reason to cheer

Strategy: Nifty consolidates in November; Earnings provide a breath of fresh air

• Nifty consolidates in November after a stellar October: The Nifty consolidated (down by ~1%) in November, after a stellar 5.6% rally in October. FIIs were net buyers for the second consecutive month (USD3b) and DII flows remained robust (USD1.4b) in November. Midcaps (+1.6% in November, after an 8% upmove in October) outperformed the Nifty, led by robust DII flows, and continued to command a rich premium of 62% v/s large caps. In YTD CY17, India recorded MF inflows of USD16.8b, exceeding full-year inflows of USD7.1b in CY16. FII inflows stand at USD8.5b for YTD CY17.
  
• Earnings – a reason to cheer; Consumption revival on the cards: After a long time, earnings did not disappoint. Sales, EBITDA and PAT for MOSL Universe ex OMCs increased 10.4%, 13.9% and 9.2% v/s expectations of 10.9%, 10.9% and 11.7%, respectively. More importantly, the quality of earnings was much superior compared to the previous few quarters. For example: a] Surprise/miss ratio was at a 16-quarter high, b] Breadth was healthy, with 14 of the 17 sectors meeting or exceeding our EBITDA estimates. c] Upgrade/downgrade ratio improved sharply from 0.46x in 1QFY18 to 0.84x in 2QFY18. d] Number of companies reporting a YoY decline in earnings in our universe was at a 12-quarter low. Key takeaway from the 2QFY18 earnings season was the revival of consumption – especially rural – on the back of good monsoon, a recovery in real rural wage growth, healthy MSP price hikes, and rising scope of DBT. 2HFY18 is also expected to benefit from normalization of supply chain post initial teething issues pertaining to GST. Corporate commentaries in consumption-oriented sectors like Autos, FMCG, Durables, Discretionary Consumption clearly pointed toward a consumption revival.