Strategy: Nifty consolidates in November; Earnings provide a breath of fresh air
* Nifty consolidates in November after a stellar October: The Nifty consolidated (down by ~1%) in November, after a stellar 5.6% rally in October. FIIs were net buyers for the second consecutive month (USD3b) and DII flows remained robust (USD1.4b) in November. Midcaps (+1.6% in November, after an 8% upmove in October) outperformed the Nifty, led by robust DII flows, and continued to command a rich premium of 62% v/s large caps. In YTD CY17, India recorded MF inflows of USD16.8b, exceeding full-year inflows of USD7.1b in CY16. FII inflows stand at USD8.5b for YTD CY17.
* Earnings – a reason to cheer; Consumption revival on the cards: After a long time, earnings did not disappoint. Sales, EBITDA and PAT for MOSL Universe ex OMCs increased 10.4%, 13.9% and 9.2% v/s expectations of 10.9%, 10.9% and 11.7%, respectively. More importantly, the quality of earnings was much superior compared to the previous few quarters. For example: a] Surprise/miss ratio was at a 16-quarter high, b] Breadth was healthy, with 14 of the 17 sectors meeting or exceeding our EBITDA estimates. c] Upgrade/downgrade ratio improved sharply from 0.46x in 1QFY18 to 0.84x in 2QFY18. d] Number of companies reporting a YoY decline in earnings in our universe was at a 12-quarter low. Key takeaway from the 2QFY18 earnings season was the revival of consumption – especially rural – on the back of good monsoon, a recovery in real rural wage growth, healthy MSP price hikes, and rising scope of DBT. 2HFY18 is also expected to benefit from normalization of supply chain post initial teething issues pertaining to GST. Corporate commentaries in consumption-oriented sectors like Autos, FMCG, Durables, Discretionary Consumption clearly pointed toward a consumption revival.
* India among the best-performing markets in YTD CY17: For CY17 YTD, MSCI EM (+30%), India-Sensex (+24%), Korea (+22%), Brazil (+19%) and Japan (+19%) were the best performers among the key global markets in local currency terms. In dollar terms, India has delivered 31% returns in YTDCY17. On the other hand, Russia (-15%) has delivered negative returns. Over the last 12 months, MSCI EM (+30%) has outperformed MSCI India (+23%). However, over the last five years, MSCI India has outperformed MSCI EM by 62%.
* Sectoral performance trends – Real Estate, Technology and Media outperform: Real Estate (+6%), Technology (+4%), Media (+3%), PSU Banks (+2%), Private Banks (+2%) and Consumer (+1%) were the top performers. Seven sectors delivered negative returns in November. In this edition of ‘Bulls & Bears’, we take a deep dive into the valuation metrics of the Consumer sector.
* Earnings recovery ahead; Gujarat elections near-term trigger: Nifty has been consolidating in the 10,000-10,500 band. The 2QFY18 earnings season has come as a breath of fresh air and rekindled hopes of earnings having troughed. Expectations of an earnings revival in 2HFY18 and FY19 will keep sentiment positive, in our view. Meanwhile, crude has rallied and is now in the USD60-65 band, and can act as a source of worry if prices were to rally further. Government does not have the fiscal room to manage any sudden spike in crude prices (fiscal deficit has reached 96% of budget estimates in the first seven months of FY18). Nonetheless, India’s macros have remained healthy on balance. The key near-term trigger is the outcome of Gujarat state elections – victory of BJP will be cheered by the markets, in our view. We expect consumption to revive in 2HFY18. We had outlined our thesis on rural consumption revival in our recently released Volume II of Rural Strategy. Some of the themes that we like from the CY18 perspective are: a] Shift from retail to corporate lenders. b] Consumption revival. c] Cyclical recovery in Infrastructure. d] Contra play in Pharma. e] Dawn in Telecom sector. ICICI Bank, Sun Pharma, SBI, Coal India, Emami, Titan, SHTF, Bajaj Auto, RBL and IGL are some of our preferred bets.
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