A new Samvat – a new beginning!
Samvat 2075 was an eventful year marked with domestic and global economic slowdown amidst many big events. This led to huge volatility throughout last one year and sharp divergence in market returns. Overall Nifty delivered a return of 11% since Diwali last year (7th Nov’18) till 15 th Oct’19, while the broader market underperformed with Nifty Midcap 100/ Nifty Smallcap 100 down 6%/10% over the same period.
Samvat 2075 – a year of elevated stress and volatility: Over the last 12 months, Indian equities have been facing double whammy in the form of economic slowdown and stress in the financial sector. Since the ILFS crisis in Sept 2018, the financial sector has continued to see elevated stress across NBFCs / HFCs. This had also spread to the banking sector, where many leveraged companies has become an area of concern. Overall economic parameters slumped with GDP estimates being revised down, meaningfully. In this context, earnings again saw continuous downgrades and hopes of recovery saw further delay, as has been the feature for almost a decade now. Amidst all these economic concerns, India voted in 2019 General election with a stronger mandate for BJP government. A bigger absolute majority has given hopes of stronger reforms to help the economy weather the slowdown and recover from its lows.
Monetary easing along with fiscal stimulus will be key in Samvat 2076: Last 12 months have seen a new Finance Minister and RBI governor. Monetary easing has been a feature since beginning of 2019 with multiple rate cuts by RBI, even though the transmission has been limited till date. Globally, all key central banks have also changed their stance to easing and stimulate the respective economies. This has made way for RBI to take further easing measures and ensure higher transmission in the system. On the government side, the FM took a giant leap last month by announcing a big-bang fiscal stimulus in the form of a sharp reduction in the corporate tax rate from 30% to 22% and a fillip for investments in manufacturing. This measure provides a sizable boost to the corporates with potential to drive investment and sentiment. The government has also committed to further reforms and could further stimulate demand by reduction in personal income taxes. Disinvestment is likely to be a big revenue driver in 2020, given the big moves in many strategic sales. Monsoons in 2019 has been the best in the long time and global crude prices are stable in range of USD6-70/bbl. This favorable macro backdrop would warrant further measures on both monetary and fiscal front.
Corporate earnings revival to take more time: The corporate earnings have been muted throughout the year and is expected to be tepid in near to medium term as well. Earnings risks continue to be tilted to the downside on account of the underlying weak demand scenario, the uneven asset quality trends in financials and the deflationary trends in commodity prices. Thus, for 2QFY20, we expect Nifty sales/EBITDA/PAT to decline by 2%/2%/8%. The reduction in the corporate tax rate has brought some cheer to earnings, but for FY20, it will largely limit the earnings downgrades rather than drive big upgrades. The silver lining to this somber backdrop is that the festive season demand has begun on a positive note. Thus while we are expecting 12% EPS growth in FY20 for Nifty, we are estimating strong revival of 28% growth in FY21.
Samvat 2076 – Could this phase narrow the market divergence? The government’s stimulus measure has lifted market sentiment and resulted in a sharp rally subsequently. Nonetheless, large-caps continue outperforming mid-caps. The big divergence within Nifty as well as versus mid-cap/small-cap indices also remains as the street continues clamoring to hide in quality in times of tepid earnings delivery. Going ahead, markets are likely to remain volatile in near term till economic recovery is visible. However, the revival in sentiments has arrested the negative feedback loop and changed the narrative. The backdrop for the economy and earnings is improving as we step into new Samvat. We also expect the FII flow to respond positively to these measures and grow as economic activity gets better. Thus, the three key factors to watch out for would be reducing stress in financial sector, further stimulus announcements by the government to boost consumption and overall economic growth and resolution of US-China trade war. We would suggest Investors to take this as an opportunity to accumulate quality names for long term. We do believe that the Nifty is richly valued at 20x FY20E earnings, despite several of its constituents trading at a substantial 30-40% discount to their respective long-period average valuations.
Large-caps: ICICI Bank, SBI, HDFC, Bharti Airtel, L&T, HUL, Titan.
Mid-caps: Indian Hotels, MMFS, Ashok Leyland, ABFRL, JK Cement, Colgate, Petronet LNG, PI Industries.
Contra Ideas: Coal India, Motherson Sumi, Page Industries, LIC Housing Finance, Birla Corp.
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