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MOSL: INDIA STRATEGY-Revisiting the tale of divergence; Divergence within and outside Nifty continues

India Strategy: Revisiting the tale of divergence; Divergence within and outside Nifty continues; presenting top Mid-cap bets

 

The Indian government’s big-bang measure of reducing the corporate tax rate has lifted market sentiment and resulted in a sharp rally subsequently. Nonetheless, from an index perspective, large-caps continue outperforming mid-caps. In fact, the concentration of the market performance in select Nifty stocks and the big divergence in the benchmark’s performance within as well as versus mid-cap and small-cap indices were the trends we discussed in detail in Mar’19. In this note, we revisit those trends, observing that the divergence has expanded even further over the last six months. We also present our top mid-cap bets.

 

Divergence within Nifty at new high: BIG continue to get BIGGER

• The government last week announced slashing of the corporate tax rate from 30% to 22% along with other measures to boost manufacturing. The reduction in tax rates will likely improve corporate profitability and augur well for the private capex investment cycle over next few years. The tax cut benefits will accrue across the board. Effective tax rates for Nifty-Midcap 100 for FY17/18/19 stood at 30.6%/33.1%/36.7%. Higher rate for FY19 is owing to the significant losses in several PSU Banks in the Mid-cap 100 index.
• The fiscal stimulus has driven a sharp upswing in the market and lifted sentiment. Nonetheless, we note that the trend of large-caps outperforming mid-caps has continued post the tax rate cut announcement.
• The concentration of the market performance in select Nifty stocks and the big divergence in the benchmark's performance within as well as versus mid-cap and small-cap indices is a trend we highlighted in Mar'19. We revisit those trends again in this note.