MOSL: BULLS & BEARS (November 2017)-India Valuations Handbook — Momentum picks up-PSU Bank recapitalization boosts sentiment

​BULLS & BEARS (November 2017): India Valuations Handbook — Momentum picks up; PSU Bank recapitalization boosts sentiment

Strategy: Nifty up 5.6% in October; GoI announces recapitalization of PSU Banks

• Momentum continues unabated: Nifty rose 5.6% in October – the second-highest increase in 19 months – led by positive local and global news flows, strong domestic liquidity, and the government’s announcement on PSU Bank recapitalization. Beaten-down sectors like PSU Banks and Telecom have been the key outperformers in October. FIIs turned net buyers after two months (USD0.3b in October) and DII flows remain robust (USD1.5b in October). Midcaps (8% rise in October) outperformed the Nifty, led by robust DII flows and continue to command rich premium of 45% v/s large caps. In YTD CY17, India recorded MF inflows of USD15.1b, exceeding full-year inflows of USD7.1b in CY16. FII inflows for YTD CY17 stand at USD5.5b.
  
• PSU Bank recapitalization can provide a fillip; GST headwinds settling down: The macro environment seems to be bottoming out, with a series of positive high-frequency data (core sector growth, PMI, etc). The GoI has announced a PSU Bank recapitalization package of INR2.11t. This is a big positive and could revive the almost comatose ~70% of the banking system, and in turn, revive credit and private capex cycle. The recent increase in crude prices could put inflation estimates at risk, and to that extent, crimps the RBI’s ability to cut rates in December. Growth slowdown on the back of GST implementation is transitory, in our view; however, the pace and extent of recovery is still uncertain. 2QFY18 results are progressing in-line so far. Sales, EBITDA and PAT for MOSL Universe ex OMCs have grown 10.3%, 11%, and 5.9%, respectively v/s expectations of 11.8%, 9.8% and 8%. Management commentary seems positive for Consumer and Autos, with expectations of rural revival and settling down of the GST regime. However, commodity costs are hardening and there could be margin pressure, going forward.