Bulls and bears

BULLS & BEARS is a handbook on valuations in India, released by Motilal Oswal.

Market witnesses elevated volatility as the second COVID wave surges, consolidates in Apr’21: The Nifty ended its two-month winning streak in Apr’21. The index oscillated ~900 points before closing 60 points, or 0.4%, lower MoM at 14,631. The Nifty is up 4.6% in CY21 so far. FII outflows of USD1.5b were seen after six consecutive months of inflows. DIIs saw inflows for the second consecutive month at USD1.5b. Midcaps/smallcaps outperformed largecaps by 2.5%/6% in Apr’21. Over the last 12 months, midcaps are up 79% v/s a 48% rise for the Nifty. The Nifty Midcap100 P/E ratio now trades at a 10% discount to largecaps at 18.1x.

Earnings season broadly in line so far: As of 3rd May’21, 59/21 MOFSL Universe/Nifty companies have announced their 4QFY21 results. Sales/EBITDA/PBT/PAT for the 19 Nifty companies grew 13%/15%/38%/37% YoY (v/s our estimate of 14%/13%/40%/37% YoY). Six Nifty companies have beaten our PAT expectations, while eight have missed. On the EBITDA front, three have surpassed, six have missed, and 12 have met our expectations. For the MOFSL Universe, sales/EBITDA/PBT/PAT growth stands at 14%/18%/41%/39% YoY (v/s our expectation of 15%/18%/44%/42% YoY).

India among the laggards in Apr’21. Key global markets like Taiwan (+7%), the US (+5%), the UK (+4%), Korea (+3%), MSCI EM (+2%), and Brazil (+2%) closed higher in local currency terms in Apr’21. However, Japan (-1%), India (-0.4%), and Russia (-0.4%) ended lower. Over the last 12 months, the performance of MSCI India (+47%) and MSCI EM (+46%) are identical. Over the last 10 years, MSCI India has outperformed MSCI EM by 112%. The P/E of MSCI India is at a 77% premium to MSCI EM, above its historical average of 57%.

Metals, Healthcare, and Telecom are top performers: Among sectors, Metals (+22%), Healthcare (+10%), and Telecom (+4%), were the top performers. While Real Estate (-7%), PSU Banks (-5%), Capital Goods (-4%), and Consumer (-4%) were the top laggards. JSW Steel (+53%), Tata Steel (+27%), Wipro (+19%), Dr. Reddy’s (+14%), and Bajaj Finserv (+14%) were the top performers. HCL Technologies (-9%), ITC (-7%), Eicher Motors (-7%), UltraTech Cement (-7%), and Maruti Suzuki (-6%) were the key laggards. In this edition, we take a deep dive into the valuation metrics of Consumer sector.

Rising COVID-19 cases a headwind: Resurgence of the second COVID wave has muddied sentiments and impaired FY22E earnings visibility. While the market is currently looking beyond the short-term impact, if the pandemic doesn’t subside soon, it opens up downside risks. 4QFY21 earnings are progressing largely in line with our expectations, but earnings downgrades are now rising, given the widespread restrictions in various states, which is hurting mobility and economic recovery. The interplay of resurgence in COVID-19 cases and the pace of vaccination would decide the trajectory of economic recovery going forward. The Nifty now trades at a 12-month forward P/E of 20.1x, ~7% above its historical average of 18.8x. At 2.9x, the Nifty P/B is well above its historical average of 2.6x. The market capitalization-to-GDP ratio is at a new year-end high of 106% (expect FY21E nominal GDP to decline by 4% YoY). BCS Bureau