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A stellar end to the fiscal

FY21 witnesses a sharp bounce-back

* The Nifty ended FY21 with stellar (71%) returns. The returns look stellar due to the low base of FY20 when markets fell 26%. The market delivered positive returns in all four quarters of FY21. FII flows in equities in FY21 were the highest ever at US$ 37.6b while DII equity flows saw outflows after five consecutive years of inflows.

*After the Covid led sharp correction in Mar’20, which dragged the FY20 returns, markets gradually recouped its losses in FY21, led by policy measures by governments, central banks as well as a better than expected corporate earnings performance which resulted in two consecutive quarters of earnings upgrades, a first in many years. Infact, Nifty earnings growth of 13.5% in FY21E is expected to be the best in six years [Exhibit 7].

* The year ended far better than it began – as economy and markets recovered post May’20 with gradual easing of lockdowns. Corporate India surmounted the challenges posed by Covid with unprecedented cost containment measures with parallel improvement in balance sheet as well as cash-flows.

* All sectors delivered positive returns in FY21. The Nifty Midcap 100 (+102% YoY) and Nifty Smallcap 100 (+126% YoY) outperformed the benchmark. Top gainers in the sectoral space were Metals (+151%), Autos (+108%), Technology (+103%), Real Estate (+90%), and Private Banks (+75%) while Consumer underperformed [Exhibit 2]. The theme of FY21 was high beta, cyclicals and value. Quality and defensive themes, the flavor of the past few years, took a breather.

* Stock performers: The breadth was positive in FY21, with 49 Nifty stocks closing higher. Coal India (-7%) was the only stock in Nifty which ended lower. Top performers were Tata Motors (+325%), Hindalco Industries (+242%), JSW Steel (+219%), Grasim Industries (+205%), and Tata Steel (+201%). The Top-5 performers belonged to Cyclical space while the bottom five are dominated by Defensives.

* Flows: India recorded the highest ever FII inflows of USD37.6b, greater than the cumulative inflows of the last six years. DIIs recorded the first outflows of USD18.4b after five years of inflows.

* Valuations: After the sharp rebound, the Nifty now trades at a 12-month forward P/E of 20.7x, ~10% above its historical average of 18.8x. At 3.1x, the Nifty P/B is also well above its historical average of 2.6x. The market capitalization-to-GDP is at a new yearend high of 105% (FY21E nominal GDP, which is expected to decline ~4%).

* The year ahead: As we step into FY22, two things will drive the markets from hereon, in our view. Given the recent resurgence in Covid-19 cases, the pace of vaccination will assume crucial importance. Expeditious containment of Covid19 cases and accelerated pace of vaccination will provide comfort for FY22 economic growth recovery. Secondly, the expectations for FY22 earnings are running high at 30%+ growth in Nifty FY22E EPS. Given the rich valuations, any misses on FY22 earnings delivery may act as dampener.

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