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MOSL: INDIA STRATEGY-Tale of two 9k’s (March 2015 and March 2017 )-Circle complete, will the Nifty traverse to a higher orbit?

​India Strategy: Tale of two 9k’s (March 2015 and March 2017 ); Circle complete, will the Nifty traverse to a higher orbit?

• The Nifty has traversed a full circle in two years – from ~9,000 in March 2015 back to 9,000+ in March 2017. Valuations for the Nifty based on both one-year forward earnings and on trailing earnings are rich but at similar levels to March 2015.
  
• The Nifty’s earnings performance has been flat over the last three years. However, going forward, we are estimating healthy 21% earnings CAGR, aided by a low base of 2HFY17 and a recovery in Metals, PSU Banks and Oil & Gas.
  
• The macro backdrop remains conducive – the fiscal and monetary metrics are encouraging, and the BJP’s strong showing in the recent state elections should provide tailwinds for further reforms.
  
• Over the last three years, earnings expectations at the start of the year have ended in disappointment towards the end of the year, which puts earnings delivery (23% EPS growth in FY18) as the key risk for current valuations (18.1x FY18E EPS).
  

Valuations – rich, but not in euphoric territory

Valuations for the Nifty based on one-year forward estimates are roughly at the same levels as in March 2015. When the Nifty scaled 9k in March 2015, the 12-month forward P/E (based on March 2016E EPS) was ~17.4x. Today, the 12-month forward P/E (based on March 2018E EPS) is ~18.1x. However, based on actual earnings delivery (with the advantage of hindsight), in March 2015, the Nifty’s P/E was 21.6x, as the eventual FY16 EPS (~INR393) was ~21% short of the estimate (~INR501). We are currently projecting ~23% earnings growth for the Nifty in FY18. On a trailing basis, the Nifty is trading at ~22.3x today against ~20.5x in March 2015.