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MOSL: BULLS & BEARS (March 2018)-India Valuations Handbook — Volatility makes a comeback;

BULLS & BEARS (March 2018): India Valuations Handbook — Volatility makes a comeback; Nifty corrects meaningfully in Feb’18

 

Strategy: Volatility makes a comeback; Nifty corrects meaningfully in Feb’18

• Volatility is back, Nifty down 5% in February: After rallying strongly by 4.7% in January, the Nifty corrected meaningfully by 4.9% in February. Volatility hit the markets after a largely calm CY17 due to a rise in bond yields (both in India and globally), tightening liquidity conditions, fears of inflation, and adverse market reaction to domestic policy events, especially the Union Budget. Imposition of the long-term capital gains tax – albeit grandfathered till 31st January 2018 – dampened investor sentiment. Higher bond yields resulted in rising risk premium, pulling valuations down. In February, FIIs turned net sellers (USD1.9b), while DII flows at USD2.8b were the highest since September 2017. Midcaps (-5.4% in February) underperformed the Nifty. Note that Midcaps still command a rich premium of 66% v/s large caps.
• 3QFY18 earnings season was healthy, ex-PSU Banks: Aggregate sales of MOSL Universe grew 14.3% YoY (our estimate: +14.3%), EBITDA was up 11.7% YoY (our estimate: +12.9%) and PAT increased 6.7% YoY (our estimate: +15.8%). Performance was disproportionately impacted by PSU Banks, which are grappling with continued elevated provisioning requirements and trading losses in the bond portfolio. Excluding PSU Banks, MOSL Universe sales, EBITDA and PAT grew 14.4%, 13.6% and 18.8% v/s expectations of 14.5%, 14.9%, 18.8%, respectively. Nifty aggregate sales grew 13.4% YoY (our estimate: +14.1%), EBITDA grew 8.8% (our estimate: +11.6%) and PAT grew 7% (our estimate: +13.6%). Excluding SBI, Nifty PAT growth came in at 16.6% v/s estimate of 17.5%. Out of the 19 sectors we track, 4/7/8 posted profits that were above/in-line/below our expectations. We revised our FY18E Nifty EPS downward by 3.2% to INR471 and FY19E Nifty EPS by 0.6% to INR595. SBI accounts for a disproportionate share of FY18 Nifty earnings cut. We are now building in 13%/26% EPS growth for Nifty for FY18/19E. Risks to these estimates stem from PSU Banks, given the recently revised stressed assets guidelines by the RBI.