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MOSL: BULLS & BEARS (September 2019): India Valuations Handbook — Pain continues; it’s a tale of caution and opportunity now

BULLS & BEARS (September 2019): India Valuations Handbook — Pain continues; It’s a tale of caution and opportunity now

 

Strategy: Pain continues; It’s a tale of caution and opportunity now

• Nifty nearly back to square one as the year progresses: The Nifty extended the previous month’s losses with a decline of 0.9% in Aug’19. In fact, market sentiment has deteriorated to an extent that the benchmark has wiped off majority of its gains for the year (up just 1.5% now v/s 9.8% YTD CY19 in May’19). This is a clear indication that after the election euphoria, investors have been dealt with a ‘reality check’. High frequency data (auto numbers, IIP data, core sector growth) and the recent GDP print (5% for 1QFY20, and more importantly, the internals – PFCE growth of 3%, manufacturing growth of 0.6% and nominal GDP growth of just 8% – was well below expectations) point toward a tough near-term macro. Another distress is that FII selling has continued (USD1.9b in July, USD2.2b in August) even post the rollback of FPI surcharge. DII inflows, however, remained robust at USD2.9b in the month. Mid-caps continue underperforming large-caps. On a 12-month basis, mid-cap returns (-21.4%) lagged that of Nifty’s (-5.6%). The Nifty Midcap100 P/E ratio has corrected from 25.6x in Aug’18 to 14.9x now. Mid-cap premium to the Nifty (13% in Aug’18) has also turned into a discount of 18% in Aug’19.
• No cheer from reporting season, downgrades continue: The first-quarter corporate earnings-report season was disappointing in that both the Nifty and MOFSL Universe's performance was below our expectations – Nifty earnings growth stood at 5% v/s our estimate of 12%. Moreover, commentaries have turned weaker across the board. The intensity of earnings downgrades increased with the downgrade/upgrade ratio at 3x. We have revised our Nifty FY20 EPS down by 4% to INR560, implying 16% YoY growth (ex-corporate banks, we expect Nifty profits to grow just 3% in FY20).