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Strategy: Flattish closing amidst heightened volatility; Strong DII flows continue

* Market witnesses elevated volatility, manages to close in the green: The Nifty continues to touch new highs (15,962) in Jul’21. It ended 0.3% higher MoM to close at 15,763. The Nifty is up 12.7% in CY21 YTD. The increase in volatility was on the back of weak global cues, stretched valuations, and inflation worries. Jul’21 saw the highest outflows/inflows by FIIs/DIIs since Mar’20 at -USD1.7b/USD2.5b. Midcaps/smallcaps outperformed largecaps yet again by 2.8%/7.8% in Jul’21. In the last 12 months, midcaps have risen by 80% v/s a 42% rise for the Nifty. In the last five years, midcaps have outperformed by 6%. In P/E terms, the Nifty Midcap 100 is trading at a 3% premium to the Nifty.

* Earnings season broadly in line so far: The 1QFY22 earnings season has been in line with our estimates, benefitting from a lower base of 1QFY21 as the lockdowns were less strict than in the year ago period. Of the Nifty constituents, 35 reported sales/EBITDA/PBT/PAT of 46%/31%/68%/68% YoY (est. 43%/28%/62%/63% YoY). For the MOFSL universe, sales/EBITDA/PBT/PAT growth stood at 47%/38%/71%/68% YoY (est. 44%/35%/69%/68% YoY). Nifty EPS for FY22E has seen a marginal 1% downward revisions to INR 725.

* Major economies end lower in Jul’21: Barring the US (+2% MoM), Indonesia (+1%), and India (+0.3%), Jul’21 saw key global markets such as the MSCI EM (-7%), China (-5%), Japan (-5%), Brazil (-4%), Korea (-3%), Taiwan (-3%), Russia (-1%), and the UK (-0.1%) end lower in local currency terms. In the last 12 months, MSCI India (+41%) has outperformed the MSCI EM (+18%). In the last 10 years, MSCI India has outperformed the MSCI EM by 147%. In P/E terms, MSCI India is trading at a 71% premium to MSCI EM, above its historical average of 57%.

* Real Estate, Metals, Telecom, Technology, and Capital Goods are the top performers: Among sectors, Real Estate (+16%), Metals (+11%), Telecom (+5%), Technology (+4%), and Capital Goods (+3%) were the top performers in Jul’21. Autos (-5%), Utilities (-5%), Oil and Gas (-4%), PSU Banks (-3%), and Private Banks (-2%) were the key laggards. Tata Steel (+23%), Hindalco (+19%), Bajaj Finserv (+17%), Sun Pharma (+15%), and UltraTech (+13%) were the top performers. Tata Motors (-13%), Dr. Reddy’s (-13%), Bajaj Auto (-7%), Maruti Suzuki (-7%), and Britannia (-6%) were the top laggards. In this edition, we take a dive deep into the valuation metrics of the Consumer sector.

* FY22 earnings began with a bang; momentum to continue: After a strong FY21, earnings in FY22 began on a healthy note. Earnings in 1QFY22 have been in line so far. The damage from the second COVID wave and consequent lockdowns in Apr-May’21 is much lesser v/s the national lockdown in 1QFY21. Management commentaries, across the board, suggest an improved demand environment post Jun’21, led by an easing of restrictions, fewer COVID-19 cases, and a pick-up in vaccinations. However, the impact of rising commodity prices and in general higher inflation is felt on the P&L.

* Asset quality in Financials has expectedly weakened sequentially. We expect the recovery in corporate earnings to continue as the economy opens up with progressively higher vaccinations. The Nifty now trades at a 12-months forward P/E and P/B of 20.5x and 3x, respectively, above its LPA. Thus, the risk-reward is relatively less lucrative in the near term.

* Top ideas | Largecaps: ICICI Bank, SBI, Infosys, HCL Technologies, UltraTech, M&M, HUVR, Titan, Divi’s Labs, SAIL, and SBI Cards. Midcaps: Max Financials, Chola Finance, JK Cements, Indian Hotels, Deepak Nitrite, Burger King, ICICI Securities, Orient Electric, Solara, and ABFRL.

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