MOSL: BULLS & BEARS (October 2017)-India Valuations Handbook — Nifty down for 2nd straight month

​BULLS & BEARS (October 2017): India Valuations Handbook — Nifty down for 2nd straight month; domestic macros moderate

Strategy: Nifty down for 2nd straight month; domestic macros moderate

• Nifty consolidates further: The Nifty (-1.3% in September) corrected for the second consecutive month, led by global geopolitical tensions, moderation in domestic macros (inflation, CAD, currency depreciation, noise around fiscal stimulus) and continued FII selling (USD1.7b in September). Midcaps (-0.9% in September) too corrected in line with the Nifty, but continued to command rich premium of 41% v/s large caps. Meanwhile, domestic flows remained resilient, with the month witnessing inflows of USD3.2b. In YTD CY17, India has recorded MF inflows of USD13.7b, exceeding full-year inflows of USD7.1b in CY16. FII inflows for YTD CY17 stand at USD5.2b.
  
• Moderation in domestic macros; GST implementation blurring earnings visibility: The macro narrative of India, which has been the strongest one in the past decade, has moderated slightly, with 1QFY18 GDP growth of 5.7%, currency weakening ~2% on the back of USD3.7b FII selling, capacity outages due to crude prices rallying post Hurricane Harvey in the US, and current account deficit coming in at 2.4%. Higher crude prices also put inflation estimates at risk, and to that extent, crimps the RBI’s ability to cut rates (the central bank kept the key rates unchanged in its policy announced today and revised down its GVA forecast to 6.7% for FY18 from earlier 7.3%). Even the project data released by CMIE point toward subdued private capex trends – part of it is also owing to GST transition. Growth slowdown on the back of GST implementation seems transitory, in our view; however, the pace and extent of the recovery is uncertain till the economy settles down with GST. Latest high frequency data (core sector growth, manufacturing PMI) were encouraging. Even the auto monthly numbers for September 2017 were healthy. However, part of it can be attributed to mismatch in the festive season, and one needs to watch out data for 3-4 months before forming a conclusive view, one way or the other. Earnings visibility for FY18 remains clouded owing to GST-related uncertainties and continued asset quality issues in PSU banks.