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MOSL: BULLS & BEARS (December 2019)-India Valuations Handbook — Markets rally for third straight month

BULLS & BEARS (December 2019): India Valuations Handbook — Markets rally for third straight month; FII inflows highest in 8 months

 

Strategy: Markets rally for third straight month; FII inflows highest in 8 months

• Nifty maintains winning streak: The Nifty surpassed the 12,000 mark in Nov’19 to hit a record high; after a strong 4.1%/3.5% rally in Sep’19/Oct’19, the Nifty ended 1.5% higher MoM in Nov’19. The rally was on the back of strong FII inflows, improved global backdrop, government efforts to arrest slowdown with structural reforms and an in-line earnings season. Further, series of policy changes by the government and the RBI helped revive sentiments. While FIIs continued their buying streak in Nov’19 (inflows increased from USD2.1b in Oct’19 to USD3.1b in Nov’19), DII inflows turned negative for the first time in 7 months (-USD1.1b). Mid-caps outperformed the Nifty by 0.9% in Nov’19, underscoring the sentiment change. On a 12-month basis, mid-cap returns (-1.6%) lagged the Nifty’s returns (+10.8%). The Nifty Midcap100 P/E now trades near to the Nifty-50.
• 2QFY20 earnings season operationally in line; tax cut drives PAT beat: The 2QFY20 corporate earnings season was in line with our modest expectations. While the corporate tax rate cuts helped in arresting earnings downgrades, management commentaries do not suggest an imminent recovery. Demand concerns in the economy are now coming to the fore, the continuation of which can raise the risk for earnings downgrades in FY21. Nifty sales/EBITDA/PBT/PAT grew -2.5%/2.1%/-3.1%/8.3% YoY (v/s our est. -2.1%/-2.4%/-3.9%/-8%). Excluding Corporate Banks, Nifty PBT was down 10.6% YoY (v/s our est. -11.8%). For the MOFSL Universe, sales/EBITDA/PBT/PAT grew -2% /2.1%/-0.6%/11.7% (v/s our est. -1.1%/-1.1%/1.7%/-6.1% YoY). The divergence between PBT and PAT performance can largely be attributed to the corporate tax rate cut. We have maintained our Nifty FY20 EPS estimate at INR538, growth of 12.5% and entirely led by Financials.
• India performs in line with developed markets: In Nov’19, barring Indonesia (-3%) and China (-2%), all key global markets – the US (+3%), Russia (+2%), Japan (+2%), India (+2%), the UK (+1%), Taiwan (+1%) and Brazil (+1%) – closed higher in local currency terms. Over the last 12 months, MSCI India (+7%) outperformed MSCI EM (5%). Notably, over the last 10 years, MSCI India has outperformed MSCI EM by 89%. MSCI India’s P/E is at a premium of 81% to MSCI EM’s P/E, above its historical average premium of 52%.