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* External risks continue to rise in CY22: The Nifty ended 3.1% MoM lower at 16,794 in Feb’22. This was the second consecutive month of a decline and in fact the second steepest MoM decline in 23 months. The global and local markets were jolted by Russian President Mr. Vladimir Putin’s decision to launch a special military operation for demilitarization of Ukraine. FII outflows have been sharp in the last two months; however, the same was matched by sharper DII inflows. In Feb’22, DIIs recorded the highest inflows since Mar’20 at USD5.6b. FIIs saw outflows for the fifth consecutive month at USD5b.

* Real GDP growth decelerates in 3QFY22; corporate earnings resilient but in line: Real GDP/GVA grew 5.4%/4.7% YoY in 3QFY22 (v/s our forecast of 5.3%/5.2% and market consensus of 5.9%/5.7%), respectively. Nominal GDP grew 15.7% YoY in 3QFY22 v/s a contraction of 6.2% YoY in 3QFY21. The Central Statistics Office (CSO) has revised its FY22 real GDP growth estimate downward to 8.9% YoY from 9.2% YoY earlier. This implies that CSO expects real GDP to grow at 4.8% YoY in 4QFY22, in line with our expectation. Corporate earnings for 3QFY22 largely stood in line with MOSL/Nifty universe posting 22%/25% YoY earnings growth, respectively. Broad-based margin contraction was witnessed owing to sharp RM inflation. While Nifty EPS estimates for FY22/FY23/FY24 remained largely stable at INR735/INR876/INR1,006, respectively, broader universe saw earnings downgrades to upgrades ratio at ~1.5x.

* Metals only gainer, while PSU Banks, Media, Real Estate, Telecom, and Auto top losers in Feb’22: In the sectoral space, PSU Banks (-11%), Media (-10%), Real Estate (-9%), Telecom (-8%) and Automobiles (-8%) were the biggest losers, while Metals (+8%) was the only sector to close in green. Hindalco (+17%), Tata Steel (+12%), Titan (+8%), Divis Lab (+6%), and Indusind Bank (+6%) were the top performers. Conversely, HDFC Life Insurance (-16%), UPL (-14%), SBI Life Insurance (-14%), Tata Motors (-12%), and BPCL (-12%) led the laggards pack.

* Global markets bore the brunt of Russia-Ukraine conflict: Barring Indonesia (+4%), China (+3%), Korea (+1%), and Brazil (+1%), Feb’22 saw key global markets such as Russia MICEX (-28%), India (-3%), the US (-3%), MSCI EM (-3%), Japan (-2%), Taiwan (-0%), and the UK (-0%) end lower in local currency terms. In the last 12 months, MSCI India (+18%) has outperformed MSCI EM (-13%). Over the last 10 years, it has outperformed MSCI EM by 170%. In P/E terms, MSCI India is trading at a 92% premium to MSCI EM, above its historical average of 60%.

* Global risk-off; higher crude prices a key risk for India: In our recent note, we highlighted about the rising external risks such as higher global inflation and potential rate hikes by the US Fed. The Russia-Ukraine conflict has resulted in a global risk-off, with equity markets undergoing intermittent bouts of correction and elevated volatility. The uncertainty over the duration and magnitude of the extant conflict could keep the market jittery and dependent on news flow. Post the recent correction, the Nifty is now trading at 19x 12-months forward P/E, which is slightly lower than its 10-year average for the first time since Nov’20. Corporate earnings remained resilient despite the challenges with 3Q/9MFY22 Nifty earnings growing at 25%/45% and forward estimates for FY22/FY23/FY24 remaining stable at INR735/INR876/INR1,006, respectively. The healthy earnings visibility can act as a cushion in an otherwise fragile external situation. Our portfolio construction is premised on stocks where the earnings visibility remains solid, pricing power is healthy, and the recent correction has led to moderation in valuation. We continue to prefer largecaps.

* Top ideas: Largecaps: HDFC, ICICI Bank, SBI, Wipro, HCL Tech, L&T, Titan, Tata Motors, HDFC Life Insurance, Dabur, Godrej Consumer, Apollo Hospitals, Gland Pharma, and Macrotech Developers. Midcaps/Smallcaps: Canara Bank, Jubilant Foodworks, SAIL, Ashok Leyland, Dalmia Bharat, Zee Entertainment, Whirlpool India, ICICI Securities, G R Infraprojects, Zensar Tech, Mahanagar Gas, and Transport Corporation.

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