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MOSL: BULLS & BEARS (January 2020): India Valuations Handbook — Nifty ends CY19 near new high

BULLS & BEARS (January 2020): India Valuations Handbook — Nifty ends CY19 near new high; Mid-caps underperform yet again

 

Strategy: Nifty ends CY19 near new high; Mid-caps underperform yet again

• Nifty ends the year with solid gains: The Nifty ended 12% higher in CY19; it witnessed strong rally after Sep’19, led by corporate tax cuts announced by the government. The positive market sentiment was further fuelled by continuous FII inflows and benign global backdrop. Nonetheless, the Nifty underperformed markets in the US, Japan and China by a wide margin. CY19 saw a revival in FII flows with inflows of USD14.2b – the highest since CY14. However, DII inflows were weak at USD6b as against USD15.9b recorded in the previous year. The Nifty Midcap100 was down 0.7%, as against the Nifty’s rise of 0.9% on MoM basis. However, over the past 12 months, mid-caps were down 4.3% as against the Nifty’s rise of 12%. The Nifty Midcap100 P/E ratio now trades at 19.7x (v/s 20.5x in Dec’18). Also, the mid-cap premium to the Nifty stood at 7% in Dec’19.
• RBI’s ‘operation twist’ after a pause in rate cuts; government focuses on infrastructure: The central bank’s move to buy long-term bonds and sell short-term bonds with an aim to reduce longer-term yields was viewed in a positive light by the market. The RBI surprised markets in its Dec’19 MPC meeting by maintaining status quo on repo rates v/s consensus expectations of a rate cut. The government, on the other hand, reiterated its INR102t infrastructure sector push over the next five years – under the National Infrastructure Pipeline (NIP) mechanism – with an aim to become a USD5t economy by 2025. Further, affirmative statements made by US-China counterparts over a trade pact to be inked in Jan’20 boosted global sentiment in Dec’19. GST collections improved and stood at INR1.03t for Dec’19. Meanwhile, on the political front, the BJP lost one more state in the recently concluded Jharkhand elections. The BJP’s presence in the ‘Cow Belt’ is diminishing – it lost Madhya Pradesh, Chattisgarh and Rajasthan state elections in Dec’18, and was unable to form the government in Maharashtra in Oct’19.
• All major economies end higher in CY19: For CY19, all key global markets – Brazil (+32%), the US (+29%), Russia (+28%), Taiwan (+23%), China (+22%), Japan (+18%), the UK (+12%), India-Nifty (+12%), Korea (+8%) and Indonesia (+2%) – closed higher in local currency terms. Over the last 12 months, MSCI EM (+15%) outperformed MSCI India (+8%). Notably, over the last 10 years, MSCI India has outperformed MSCI EM by 81%. MSCI India’s P/E is at a premium of 79% to MSCI EM’s P/E, above its historical average premium of 53%.
• Financials and Real Estate outperform; Metals and Autos suffer: For CY19, Private Banks (+31%), Real Estate (+27%), PSU Banks (+19%), NBFCs (+15%), Technology (+10%) and Oil (7%) yielded positive returns. Metals (-12%), Automobiles (-11%), Capital Goods (-10%), Utilities (-4%), Consumer (-4%), Healthcare (-4%), and Cement (-2%) were laggards. For CY19, Bajaj Finance (+60%), Bharti Airtel (+59%), ICICI Bank (+50%), Bajaj Finserv (+45%) and BPCL (+35%) were the top performers. Yes Bank (-74%), Zee Ent (-39%), M&M (-34%), GAIL (-33%) and Vedanta (-25%) were the key laggards. In this edition, we take a deep-dive into the valuation metrics of the Consumer sector.
• Market returns modest in this decade but mirror equally modest earnings growth: The decade gone by (CY09-19) can be characterized as relatively tepid as far as corporate earnings and equity returns in India are concerned. That said, India has delivered the second best returns (after the US) in the pecking order of world markets. In USD terms, however, Japan/Taiwan markets’ performance was better than India’s. Over CY09-19, the Nifty delivered an 8.8% return CAGR, mirroring the Nifty’s EPS CAGR of 8.2% over the same period. If we divide the decade into two halves, the earnings trend was slightly better in 1HCY19 with the Nifty’s EPS CAGR of 11%, which then moderated to 6% in 2HCY19. The Nifty Midcap100 delivered similar returns, while the Nifty Smallcap underperformed with just 5% CAGR. As we enter CY20, expectations of earnings recovery remains in place, notwithstanding the underlying weak macro set-up (six consecutive quarters of GDP deceleration, weak Auto numbers, and decline in Power demand/IIP/core sector data). However, we see more downside risks for earnings estimates. On the positive side, better monsoons and pick-up in inflation augurs well for rural India. CY19 was characterized by sharp polarisation between the Nifty and the Nifty Midcap/Smallcap as well as within the Nifty itself. Until earnings recover and are broad-based, we expect polarisation to continue in the near term.
• Top Ideas: Large-caps: SBI, ICICI Bank, L&T, Infosys, Bharti Airtel, NTPC, HUL, HDFC, UltraTech.

                      Mid-caps: Indian Hotels, ABFRL, Ashok Leyland, Colgate, Federal Bank, Jubilant Foodworks, JK Cement, Crompton Consumer.