MOSL: BULLS & BEARS (September 2017)-India Valuations Handbook—Nifty takes breather in August-micro-macro divergence continues

​BULLS & BEARS (September 2017): India Valuations Handbook — Nifty takes breather in August; micro-macro divergence continues

Strategy: Breather in August; micro-macro divergence continues…

• Nifty takes breather in August: The Nifty corrected 1.6% in August after crossing the 10k mark. Fluid global backdrop, USD2b of FII selling, and disappointing earnings triggered the correction. Midcaps (-1.3% in August) trailed the Nifty, but valuation premium v/s large caps expanded to 22% (14% in July). FII outflow of USD2b was compensated by USD2.4b inflow from domestic MFs. In YTDCY17, India has received MF inflows of USD10.7b, exceeding the full-year inflows of USD7.1b in CY16. FII inflows for YTDCY17 stand at USD6.9b, more than the cumulative inflows of USD6.3b in CY15 and CY16. While the earnings season was muted, even the macro print was subdued, with 1QFY18 GDP growth at 5.7%, the lowest in three years. The performance, marred by GST transition, was well below street expectations. We have cut our GDP growth forecast for FY18 from 7.1% to 6.7%.
  
• 1QFY18 earnings disappointing; Nifty EPS cut 2.7%: The 1QFY18 earnings season marked another quarter of weak performance and a subdued start to FY18, impacted by GST-related destocking. Aggregate sales of MOSL Universe grew 9.8% YoY (our estimate: +6.6%), EBITDA was up 1.1% YoY (our estimate: +3.7%), and PAT declined 9.3% YoY (our estimate: -2.8%). In our Universe, we downgraded ratings for nine stocks and upgraded for five stocks in 1QFY18. We have cut our Nifty EPS estimate for FY18 by 2.6% to INR484, and maintain our FY19E Nifty EPS at INR602. We are now building in 14% EPS growth for the Nifty for FY18E.
  
• India among the best-performing markets in YTDCY17: For CY17 YTD, MSCI EM (+26%), India-Sensex (+19%), Brazil (+18%), Korea (+17%) and Taiwan (+14%) were the best performers among the key global markets in local currency terms. Russia (-12%) has underperformed significantly. Over the last 12 months, MSCI EM (+22%) has outperformed MSCI India (+11%). However, in the last five years, MSCI India has outperformed MSCI EM by 91%.