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Strategy: Budget propels market higher in Feb’21; India outperforms global markets

* Nifty up 6.6% in Feb'21:

After consolidating in Jan'21 (down 2.5% MoM), the Nifty headed north in Feb'21 (up 6.6% MoM). It closed above the psychological 15k mark on 8 Feb'21 and ended the month at 14,529. The Union Budget was a major positive, with better transparency and higher capex spending buoying the market in the first half of Feb'21. In the latter part of Feb'21, there was a sustained correction on the back of sell-off in global bond markets and rising coronavirus cases in India. The Nifty Midcap 100 outperformed the Nifty by 4.7% in Feb'21. FII inflows were robust at USD3b. Domestic flows remain negative (at USD2.2b). Over the last 12 months, midcaps are up 39% v/s a rise of 30% for the Nifty.

* Indian economy out of a technical recession in 3QFY21; expect real GDP to grow 3.5% YoY in 4Q: Real GDP/GVA grew 0.4%/1% YoY in 3QFY21 (v/s our forecast of -0.7%/-0.5% and market consensus of +0.5%/+0.7%). Real GDP growth in 3QFY20 was revised downward to 3.3% YoY from 4.1%. Growth in real GDP was largely attributable to a 2.1% YoY growth in Gross Fixed Capital. Within GCF, real investment - Gross Fixed Capital Formation (GFCF) and change in inventories - showed an improvement in 3QFY21. Consumption expenditure, however, was a laggard (down 2.2% YoY) in 3QFY21, led by contraction in both personal and government consumption.

* Big beats and upgrades from the 3QFY21 earnings season: The 3QFY21 corporate earnings season revved up from 2Q, with big beats and upgrades reported across MOFSL's coverage universe. MOSL Universe and Nifty posted earnings growth of 31% and 22%, vs. our expectations of 17% and 7%, respectively. The underlying recovery has led to the broad-basing of growth. The performance, while broad-based, was led by cyclical sectors such as Metals, Autos, and Cement. About 57% of companies in MOFSL's coverage universe beat our estimates, while 24% reported below than expected earnings. This resulted in the second consecutive quarter of material upgrades for Nifty EPS (5%/3% upward revision in Nifty FY21/22 EPS).

* India best-performing market in Feb'21: Barring Brazil (-4% MoM), Feb'21 saw all key global markets like India (+7%), Indonesia (+6%), Taiwan (+5%), Japan (+5%), the US (+3%), Korea (+1%), the UK (+1%), China (+1%), MSCI EM (+1%), and Russia (+1%) closed higher in local currency terms. Over the last 12 months, MSCI EM (+33%) outperformed MSCI India (+30%). Over the last 10 years, MSCI India outperformed MSCI EM by 115%. In P/E terms, MSCI India is trading at a 61% premium to MSCI EM and above its historical average of 54%.

* Consumer, Healthcare, Media, and Technology lag in Feb'21: PSU Banks (+32%), Metals (+24%), Utilities (+21%), Oil and Gas (+16%), and Real Estate (+14%) were the top performers, while Consumer (-2%), Healthcare (-2%), Media (-2%), and Technology (-1%) were the only losers. Hindalco (+51%), SBI (+38%), Adani Ports (+32%), ONGC (+26%), and IndusInd Bank (+26%) outperformed, while Eicher Motors (-9%), TCS (-7%), HUL (-6%), Nestle (-6%), and Asian Paints (-5%) lagged. In this edition, we take a deep dive into the valuation metrics of companies in the Capital Goods space.

* Benign backdrop for Equities; Capex and investment revival on the horizon: The government's focus on fiscal expansion and capex spending augurs well for the revival of the long-anticipated private investment cycle. Nifty valuations at 20.3x FY22 EPS are not inexpensive and demand consistent delivery of earnings ahead. Rising bond yields may cap equity valuations as the RBI may have to do a fine balancing act to keep bond yields at lower levels while managing the government's borrowing program.

* Top Ideas: Largecaps: ICICI Bank, SBI, Axis Bank, UltraTech Cement, M&M, L&T, Hindalco, Infosys, HCL Tech, Titan, HUL and Sun Pharma.

* Midcaps: Varun Beverages, AU SF Bank, Max Financial, Ashok Leyland, SAIL, SHTF, JK Cement, IEX, Crompton Consumer, and L&T Tech.

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