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Strategy: Nifty closes at record high in May’21; India outperforms global markets

* Nifty resumes upward journey in May’21:

After consolidating in Apr’21 (down 0.4% MoM), the Nifty headed north in May’21 (up 6.5% MoM) to close at an all-time high of 15,583. The Nifty is up 11.5% thus far in CY21. The rally was propelled by strong FII inflows in the second half of the month and steady decline in daily COVID-19 cases in India as well as supported by strength in other Asian stock markets.

* FII inflows were back and stood at USD0.7b.

DIIs saw inflows for the third consecutive month at USD0.3b. Over the last 12 months, midcaps are up 94% v/s a rise of 63% for the Nifty. Over the last five years, midcaps have outperformed by 3%. The Nifty Midcap-100 P/E ratio now trades in line with largecaps.

* Real GVA/GDP up 3.7%/1.6% YoY in 4QFY21; expect real GVA/GDP to grow 15–20% YoY in 1QFY22:

Real GVA growth came in at 3.7% YoY in 4QFY21 and declined 6.2% YoY in FY21, against growth of 4.1% YoY in FY20. Real GDP came in at 1.6% YoY in 4QFY21 and fell 7.3% YoY in FY21 v/s growth of 4% YoY in FY20. Surprisingly, nominal GDP grew 8.7% YoY in 4QFY21 (marginally lower than 8.8% YoY in 4QFY20), leading to 3% YoY decline in FY21 (v/s 7.8% YoY growth in FY20).

* Earnings season broadly in-line thus far:

As of 2nd June’21, 165/46 MOFSL Universe/Nifty companies have announced their 4QFY21 results. Sales/EBITDA/PBT/PAT for the 46 Nifty companies has grown 18%/40%/107%/88% YoY (v/s our estimate of 20%/33%/98%/76% YoY). 16 Nifty companies have beaten our PAT expectations, while 15 have missed. For the MOFSL Universe, sales/EBITDA/PBT/PAT growth stands at 18%/44%/117%/87% YoY (v/s our expectation of 20%/39%/108%/82% YoY).

* India the best performing market in May’21:

Barring Taiwan (-3% MoM) and Indonesia (-1%), May’21 saw all the key global markets, such as India (+7%), Brazil (+6%), China (+5%), Russia (+2%), MSCI EM (+2%), Korea (+2%), the UK (+1%), and the US (+1%), end higher in local currency terms. Over the last 12 months, MSCI India (+60%) has outperformed MSCI EM (+48%). Over the last 10 years, MSCI India has outperformed MSCI EM by 127%. In P/E terms, MSCI India is trading at an 87% premium to MSCI EM, above the historical average of 57%.

* PSU Banks, Media, Utilities, and Capital Goods the top performers:

Among the sectors, PSU Banks (+18%), Media (+14%), Utilities (+14%), Capital Goods (+11%), and Oil & Gas (+10%) were the top performers in May’21. UPL (+34%), IOCL (+20%), SBI (+20%), Asian Paints (+17%), and BPCL (+12%) were the top performers. Tata Consumer (-1%), Shree Cement (-1%), JSW Steel (-1%), HUL (-1%), Bharti Airtel (-0%), and Britannia (-0%) were the only laggards. In this edition, we dive deep into the valuation metrics of the Technology sector.

* Demand recovery and cost optimization key to FY22:

The second COVID wave has now started to recede, with the number of active COVID cases down >50% since 9th May to sub-18 lakhs now. There is greater visibility on vaccine supply now v/s April’21 and May’21. The expeditious containment of active COVID-19 cases and accelerated pace of vaccinations would boost and provide confidence in economic growth recovery in FY22E. As states ease restrictions gradually in Jun’21, we expect the demand environment to get better. However, after the recent run-up, the Nifty now trades at rich valuations of 17.9x FY23 EPS. Thus, any misses in the FY22E earnings delivery may act as a dampener.

* Top Ideas | Largecaps:

ICICI Bank, SBI, UltraTech Cement, Divi’s Labs, Hindalco, SBI Cards, Infosys, HCL Tech, M&M, HUVR, and Titan Midcaps: Gujarat Gas, Orient Electric, Varun Beverages, SAIL, L&T Technology, Chola. Inv., Gland Pharma, Endurance, Emami, and Federal Bank.

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