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MOSL: BULLS & BEARS (June 2018)-India Valuations Handbook — Markets consolidate in May amidst continued FII selling

BULLS & BEARS (June 2018): India Valuations Handbook — Markets consolidate in May amidst continued FII selling

 

Strategy: Markets consolidate in May amidst continued FII selling

• Nifty consolidated in May: After a strong 6.2% rally in April, Nifty ended flat in May. Political news flow (Karnataka Elections outcome, by-polls in last week of May) coupled with concerns on crude and currency kept the markets on the edge. Earnings season concluded without much flutter. In May, while DII inflows were USD 2.2b (USD 1.3b in April), FII selling continued and stood at USD 1.4b (USD0.9b selling in April). In FY18, DIIs bought USD17.7b, almost ~4x of FY17, while FII flows were USD3.2b, less than 50% of FY17 flows. Midcaps (down 6.8% in May) underperformed the Nifty in May and lag Nifty on a trailing 12 month basis (8% return v/s Nifty’s 12%). Due to this sharp underperformance in May’19 the premium of Midcaps v/s large caps narrowed from 23% to 19%. Macro picture is brightening at the margin with continued uptick in GDP growth (7.7% growth in 4QFY18) led by government spending and revival in investments.
• 4QFY18 earnings conclude; earnings recovery thesis intact: Aggregate sales of MOSL Universe grew 15.3% YoY (est. of 14.2%), EBITDA rose 9.5% YoY (est. of +10.7%) and PAT fell 17.1% YoY (est. of +11.0%). Performance was disproportionately impacted by PSU Banks and Private Corporate Banks, which saw a significant jump in slippages/provisions after the new RBI framework on asset quality (Feb’18). Excluding PSU and Private Corporate Banks, MOSL Universe sales/EBITDA/PAT grew 16.1%/16.5%/17.3% v/s estimate of 14.9%/15.5%/14.8%. Nifty aggregate sales grew 15.5% YoY (our estimate: +13.5%), EBITDA grew 13.1% (our estimate: +10.9%) and PAT grew 5.1% (our estimate: +14.4%). Excluding PSU and Private Corporate Banks, Nifty PAT growth for the rest of the 47 companies came in at 15.6% v/s estimate of 13.6%. Overall we maintained our FY19/20E Nifty EPS estimates at INR 579/INR 693, with an underlying 27% growth in Nifty profits led by Banks. However, excluding corporate banks, Nifty profits are expected to post 19% growth in FY19E.