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MOSL: BULLS & BEARS (June 2017)-India Valuations Handbook — Fifth consecutive month of positive returns for Nifty

​BULLS & BEARS (June 2017): India Valuations Handbook — Fifth consecutive month of positive returns for Nifty; midcaps underperform

Strategy: 5th consecutive month of positive returns for Nifty; midcaps underperform

Fifth consecutive month of positive returns for Nifty: The Nifty has sustained its upward momentum and delivered 3.4% returns in May, the fifth consecutive month of positive returns. Strong domestic liquidity, good earnings season, progress on GST, and prediction of normal monsoon ensured that the momentum remained intact. Midcaps have underperformed the Nifty for the first time in five months, reflecting the expensive valuations in certain pockets (midcaps trading at 7% premium to large caps). Liquidity remains benign, with FII flows of USD1.5b and Domestic MFs flows also at USD1.5b in May.

Earnings season concludes; Nifty PAT 6% ahead of estimate: The last quarter of FY17 concluded with a modest beat v/s expectations. MOSL Universe delivered 13.9% sales growth (our estimate was 14.2%), 9.3% EBITDA growth (our estimate was 6.5%), and 28.7% PAT growth (our estimate was 23.3%). For the Nifty, sales grew 13.5% (our estimate was 13.4%), EBITDA grew 4.6% (our estimate was 3.4%), and PAT grew 15.2% (our estimate was 8.6%). We have marginally revised the Sensex EPS upwards by 3% to INR1,349 for FY17, by 0.6% to INR1,581 for FY18 and by 0.9% to INR1,922 for FY19. However, just four companies (Tata Motors, Tata Steel, L&T and Reliance) account for the entire INR50b delta in Nifty PAT over our estimate. The upgrade/downgrade ratio is skewed in favor of downgrades, with 69 companies’ FY18E EPS getting downgraded by 3%+ v/s 46 companies’ FY18E EPS getting upgraded by 3%+. The Sensex is trading at a 12-month forward P/E of 19x, at a 10% premium to the long-period average of 17.3x.