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Strategy: Nifty surges to record peak; midcaps/smallcaps outperform

* Nifty maintains its winning streak: The Nifty touched a fresh high of 15,916, ending Jun’21 ~1% higher MoM at 15,722. The Nifty is up 12.4% in CY21 YTD. The rally was on the back of strong FII inflows, receding of the second COVID wave boosting confidence in an economic recovery, and an in line earnings season. FIIs continued their buying streak in Jun’21 at USD1.5b. DIIs saw inflows for the fourth consecutive month at USD1b. Midcaps/smallcaps outperformed largecaps by 3.7%/4.1% in Jun’21. In the last 12 months, midcaps have risen 83% v/s a rise of 53% for the Nifty. In the last five years, midcaps have outperformed by 5%. The Nifty Midcap100 P/E now trades at par with Nifty-50.

* Nifty delivered best in a decade earnings growth in FY21: 4QFY21 and FY21 earnings ended on a solid note with Nifty closing FY21 with a solid 23%/15% earnings/EPS growth for Nifty. For 4QFY21, Nifty Sales/EBITDA/PBT/PAT growth stood at 16%/32%/85%/76% YoY (est. 18%/27%/75%/63%). MOFSL’s Universe reported sales/EBITDA/PBT/PAT growth of 16%/37%/98%/76% YoY (est. 19%/35%/91%/72%). On a two-year CAGR basis, MOFSL’s Universe reported an EBITDA/PBT/PAT growth of 14%/17%/18%. Sales/EBITDA/PBT/PAT grew (- 5%)/17%/32%/23% YoY for Nifty constituents in FY21. Metals, Auto and BFSI led the 4Q earnings and Nifty EPS was revised upwards by 2.6%/1.4% to INR746/INR872 for FY22E/23E.

* Major economies end higher in Jun’21: Barring China (-1% MoM), Japan (-0.2%), and MSCI EM (-0.1%), Jun’21 saw all key global markets – such as Taiwan (+4%), Korea (+3%), the US (+2%), Russia (+2%), India (+1%), Indonesia (+1%), Brazil (+0.5%), and the UK (+0.2%) – end higher in local currency terms. In the last 12 months, MSCI India (+52%) has outperformed MSCI EM (+38%). In the last 10 years, MSCI India has outperformed MSCI EM by 127%. In P/E terms, MSCI India is trading at an 88% premium to MSCI EM, above its historical average of 57%.

* Technology and PSU Banks are the top performers: Among sectors, Technology (+8%), PSU Banks (+4%), Consumer (+2%), Real Estate (+2%), and Media (+2%) were the top performers in Jun’21. Tata Consumer (+14%), Infosys (+13%), Titan (+9%), Tech Mahindra (+7%), and Bajaj Finance (+7%) were the top performers. Adani Ports (-9%), ITC (-6%), Kotak Mahindra Bank (-6%), Hindalco (-6%), and ICICI Bank (-5%) were the top laggards. In this edition, we dive deep into the valuation metrics of the Metals sector.

* Sentiments improve; earnings momentum to accelerate in FY22: Corporate India displayed tremendous resilience in FY21, with the Nifty ending the year with a healthy (15%) earnings growth, which was unthinkable a year back. The second COVID wave in Apr-May’21 has soured sentiments and impacted economic activity. Since restrictions this time around was localized and less stringent v/s the lockdown in CY20, we expect the impact in 1QFY22 to be contained. We expect earnings momentum to accelerate in FY22 as the pace of vaccinations picks up and the economy opens up further. BFSI and commodities are expected to drive FY22E earnings. The market has been strong and largely looked through the second COVID wave on the back of strong liquidity and robust participation from non-institutional investors.

* Top Ideas | Largecaps: ICICI Bank, SBI, UltraTech Cement, Divi’s Labs, Hindalco, SBI Cards, Infosys, HCL Tech, M&M, HUVR, and Titan. Midcaps: Max Financial, Varun Beverages, L&T Technology, Emami, Endurance Tech, JK Cements, ICICI Securities, Indian Hotels, Aditya Birla Fashion and Orient Electric.

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