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MOSL: BULLS & BEARS (July 2017)-India Valuations Handbook — Markets take a breather-all eyes on GST and 1QFY18 earnings

​BULLS & BEARS (July 2017): India Valuations Handbook — Markets take a breather; all eyes on GST and 1QFY18 earnings

Strategy: Markets take a breather; all eyes on GST and 1QFY18 earnings

• Markets take a breather after five consecutive months of upmove: The Nifty declined 1% in June, after posting five consecutive months of positive returns. Elevated valuations, concerns about near-term earnings disruption due to GST implementation, and uncertainty about progress of monsoon weighed on investor sentiment. Midcaps (+1.3% in June) outperformed the Nifty for another month, expanding the premium v/s large-caps to 13% (7% in May). Liquidity remains benign, with FII flows of USD0.6b and domestic MFs flows of USD1.4b in June.
  
• GST implemented; monsoon progressing well: India implemented the Goods and Service Tax GST w.e.f. 1 July 2017, the most significant and long-awaited taxation reform. The implementation was widely expected by market participants, unlike demonetization which had caught the street with surprise. We believe that GST should have some impact on 1HFY18 earnings owing to channel de-stocking in 1QFY18 and implementation-related troubles in 2QFY18. However, in our view, it has several long-term positive implications for sectors like FMCG, Consumer Durables and Consumer Discretionary. Monsoon has also commenced on time, and is so far 6% ahead of long-period average. Second consecutive normal year of monsoon augurs well from rural consumption perspective and builds on to the positive momentum for rural consumption created by farm loan waivers/multi-year high MSP price hikes.
  
• India among the best-performing markets in YTD CY17: For CY17 YTD, Korea (+18%), MSCI EM (+17%), India-Sensex (+16%), Taiwan (+12%) and Indonesia (+10%) were the best performers among the key global markets in local currency terms. On the other hand, Russia (-17%) delivered negative returns. Over the last 12 months, MSCI EM (+21%) has outperformed MSCI India (+11%). However, over the last five years, MSCI India has outperformed MSCI EM by 92%.