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55% of Nifty constituents trade at premium to historical averages. Two-thirds of sectors trading at premium to their averages.

As per the Bulls & Bears report by Motilal Oswal Financial Services (MOFSL); Midcaps/Smallcaps outperformed largecaps by 4.1%/3.3% in Sep'21. In the last 12 months, midcaps have risen 79% v/s a 57% rise for the Nifty. In the last five years, midcaps have underperformed by 8%. The Nifty Midcap100 P/E now trades at a 10% premium to largecaps. The Nifty closed higher for the fifth straight month in Sep'21. The index oscillated ~900 points before closing at 486 points (or 2.8%) higher MoM at 17,618. FII inflows were robust at USD1.1b. DIIs saw inflows for the seventh consecutive month at USD0.6b.

India reported CAS of USD6.5b (0.9% of GDP) in 1QFY22 v/s deficit of USD8.1b (or 1% of GDP) in 4QFY21. A lower merchandise trade deficit drove CAS higher - it reduced to USD30.7b (or 4.4% of GDP) in 1QFY22, against USD41.7b (or 5.4% of GDP) in 4QFY21. Net foreign capital inflows rose to USD25.7b (or 3.7% of GDP) in 1QFY22, against USD12.2b (or 1.6% of GDP) in 4QFY21. This was driven by huge net Foreign Direct Investment (FDI) inflows of USD11.9b in 1QFY22 (v/s USD2.7b in 4QFY21).

Valuation deep-dive for the month: NBFCs:

NBFCs have gained market share over the years (pre-COVID), they have lost share in the Housing, Vehicle, and Tractor Finance segments in the last year. NBFCs trade at P/B of 3.5x.

HFCs’ valuations have been on an upward trajectory for the past year and trade on par with the 10-year average of 3.5x. Valuations have increased in the past year on account of (a) growth in the Affordable Housing segment, driven by robust demand, liquidity support, and tax incentives from the government; (b) a share of CPs being replaced with NCDs and public deposits leading to substantial improvement in the ALM profile; and (c) recoveries in construction and real estate finance.

Valuations of vehicle financiers has grown in the past year; they trade (@1.9x) just below the 10-year average of 2.0x. Growth would remain muted in this segment as low volumes in passenger vehicles, on account of semiconductor chip shortages, would impact disbursements

Demand for gold loans is relatively lower v/s last year, primarily on account of a reduction in emergency liquidity requirements. However, NBFCs saw traction in high ticket size gold loans on account of attractive interest rates.

Global equities: India among the best performing markets in Sep’21:

In Sep’21, key global markets such as Japan (+5%), India (+3%), Indonesia (+2%), Russia (+1%), and China (+1%) closed higher in local currency terms. On the other hand, Brazil (- 7%), the US (-5%), MSCI EM (-4%), Korea (-4%), Taiwan (-3%), and the UK (-0.5%) ended lower. Indian equities are trading at 24.1x FY22E earnings, while other key markets continue to trade at a discount to India.

Indian equities: Breadth-positive in Sep’21; 32 Nifty constituents end higher

Best and worst Nifty performers in Sep’21: Coal India (+27%), NTPC (+22%), ONGC (+20%), Tata Motors (+16%), and Kotak Mahindra Bank (+14%) were the top performers. Conversely, Tata Steel (- 11%), BPCL (-8%), Divi's Labs (-7%), Tata Consumer (-6%), and UltraTech (-6%) led the laggards.

Best and worst Nifty performers in CY21YTD: Hindalco (+103%), Tata Steel (+100%), Bajaj Finserv (+100%), Tata Motors (+81%), and Grasim Industries (+80%) are the top performers. Hero MotoCorp (-9%), Dr Reddy's Lab (-6%), and Maruti Suzuki (-4%) are the only laggards.

Indian equities: Market capitalization-to-GDP ratio rebounds:

India’s mcap-to-GDP ratio has been volatile, reaching 56% (FY20 GDP) in Mar’20 from 80% in FY19. It has rebounded to 115% presently (FY22E GDP) – above its long-term average of 79%. The Nifty is trading at 12-month forward RoE of 15.1%, above its long-term average.

55% of Nifty constituents trade at premium to historical averages:

Companies trading at a significant premium to their historical averages: HCL Technologies (+115%), Wipro (+81%), Titan (+79%), Asian Paints (+72%), and Reliance Industries (+69%).

Companies trading at a significant discount to their historical averages: Tata Steel (-65%), Coal India (-44%), JSW Steel (-40%), ONGC (-37%), and ITC (-30%).

Sector valuations: Two-thirds of sectors trading at premium to their averages:

The Technology sector is trading at P/E of 29.8x, a 69% premium to its historical average of 17.7x. 2QFY22 is expected to see strong sequential growth across companies, with midcaps continuing to outpace largecaps. The overall outlook for demand momentum is strong, and deal wins are expected to trend high.

The Auto sector is trading at P/E of 21.8x, near its historical average of 21.7x. CV/3W volumes grew 35%/14% YoY, while 2Ws/PVs declined 16%/38% YoY. Growth in CV/3W is attributable to demand revival and a low base, while the chip shortage has restricted PV growth despite strong demand.

Oil & Gas trades at P/B of 1.7x and P/E of 16.3x (21%/37% premium to historical average of 1.4x/11.9x). Brent prices in Sep’21 increased to an average of USD74.2/bbl (+USD3.5 MoM) owing to supply-side disruption and inventory shortages.

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