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MOSL: BULLS & BEARS (November 2019)-India Valuations Handbook — Nifty sparkles in Oct’19 amid robust FII flows

BULLS & BEARS (November 2019): India Valuations Handbook — Nifty sparkles in Oct’19 amid robust FII flows

 Strategy: Nifty sparkles in Oct’19 amid robust FII flows

• Festive month for the Nifty: The Nifty closed higher (at 11,877, up 3.5% MoM) for the second consecutive month in Oct’19 on the back of improved global cues, hopes of further policy actions and a good festive season. Further, series of policy changes by the government and the RBI helped revive sentiment. Additionally, corporate commentaries in the ongoing 2QFY20 result season turned marginally better. While FIIs continued their buying streak in Oct’19 (inflows doubled from USD1b in Sep’19 to USD2.1b in Oct’19), DII inflows remained subdued at USD0.7b. Mid-caps outperformed the Nifty by 1.4% in Oct’19, underscoring the sentiment change. However, on a 12-month basis, mid-cap returns (-2.2%) lagged that of the Nifty (14.4%). The Nifty Midcap100 P/E ratio corrected from 19.8x in Oct’18 to 17.9x currently. Also, the mid-cap discount to the Nifty stood at 5% in Oct’19.
• 2QFY20 earnings season – So far, in line: For 28 Nifty companies that have announced their earnings, sales/EBITDA/PBT/PAT grew -0.6%/9.1%/10.6%/12.4% YoY, as against our estimates of -0.4%/1.7%/9.7%/-1.8% YoY. Of the 28 Nifty companies, 22 have either met or exceeded our PBT estimates. For MOFSL Universe companies, sales/EBITDA/PBT/PAT increased -0.3%/7%/9.2%/12.5% YoY, as against our estimates of 0.5%/2.9%/10.6%/1.5% YoY. The earnings upgrade/downgrade ratio has been balanced so far for the MOFSL Universe; 31 companies witnessed upgrades of over 3% while 29 companies witnessed downgrades of more than 3%. Management commentaries on Auto and Corporate Banks have been positive at the margin. Our FY20 Nifty EPS estimate is stable at INR536.
• India performs in line with developed markets: In Oct’19, Japan (5%), Taiwan (5%), India (4%), Russia (4%), MSCI EM (4%), the US (2%), Korea (1%), China (1%) and Indonesia (1%) were the key global markets to close higher in local currency terms. Over the last 12 months, MSCI India is up 11% while MSCI EM is up 9%. Notably, over the last 10 years, MSCI India has outperformed MSCI EM by 98%. MSCI India’s P/E is at a premium of 88% to MSCI EM’s P/E, above its historical average premium of 51%.