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MOSL: BULLS & BEARS (March 2020)-India Valuations Handbook — Coronavirus takes toll on global equities

BULLS & BEARS (March 2020): India Valuations Handbook — Coronavirus takes toll on global equities 

 

Strategy: Coronavirus takes toll on global equities; Nifty joins the bandwagon

• Nifty mirrors global pain; coronavirus takes toll: The Nifty extended last month’s losses to close 6.4% MoM lower in Feb’20. After showing some resilience at the beginning of the month, the benchmark mirrored the slide in the global markets on the back of reports of coronavirus spreading beyond China. Dampening investor sentiment globally was reflected in more than 10% correction in the US market in just a week. Some comfort though comes from institutional flows, with FIIs infusing USD0.4b and DII flows remaining positive for second straight month at USD2.4b – the highest in six months. Nifty Midcap100 too shed 6.8%. Notably over the past 12 months, Nifty Mid-Cap 100 is flat, as against the Nifty’s rise of 3.8%. Nifty Mid-cap 100 P/E ratio of 20.5x is at a 22% premium to the Nifty.
• Earnings season in-line; BFSI and Consumer lead: The December-quarter corporate earnings season was in line with our modest expectations. Corporate tax rate cuts continued supporting earnings growth. BFSI and Consumer drove earnings, while Metals dragged the aggregates. Commentary from corporates was mixed, and at best indicated a gradual recovery ahead. We continue seeing downside risks to our earnings estimates for FY21. Nifty sales declined 2% YoY (our estimate: -3%), while EBITDA/PBT/PAT were up 11%/4%/9% YoY (our estimate: 8%/3%/9%). Performance was driven by BFSI, excluding which Nifty PBT was down 5% YoY and PAT was flat YoY (in-line). If BFSI drove the Nifty performance single handedly, global cyclicals like Metals and Oil & Gas dragged it.
• Macro remains weak; GDP growth weakens further: Real GVA/GDP grew 4.5%/4.7% YoY in 3QFY20, higher than our estimate. While CSO revised GDP/GVA growth to 5.6%/5.4% from 5.0%/4.9% for 1QFY20, the numbers for 2QFY20 were revised up to 5.1%/4.8% from 4.5%/4.3%. While weakness in real GDP growth was entirely led by investments, that in GVA growth was led by a slump in industrial activity. Details suggest that fiscal spending has been the major driver of growth all this while. However, we expect fiscal spending to taper off in 4QFY20, leading to even lower growth of ~4.5% in 4QFY20.