In this monthly outlook, let us discuss the following topics:
- Policy direction: Growth focus continues
- Q1 result season: A tad better than expected
- Time for alpha: How was result season for our key themes
- Trends in institutional flows: FPI, DII, Insurance buyers till mid-August
- Valuations and outlook: Expect a period of consolidation
Policy direction: Continues to focus on growth and Make in India
RBI chose to keep rates unchanged in its policy review in August. We maintain that if forex reserves continue to be stable, RBI would have a higher degree of monetary independence. Given our focus on growth to be able to provide employment to our people & in the event of stability on external front, we expect RBI to continue pause mode despite last inflation print being unfavorable (CPI of 7.4%, on account of food inflation). While policy rates were unchanged, yields moved up in the US and in India.
GoI is continuing to focus on Make in India. We saw items like Laptops being put under import licensing requirements, a clear indication that domestic manufacturing is preferred. Continued policy support is good for morale of India Inc.
Q1 result season: A tad better than expected
- After a 23% earnings CAGR over FY20-23, Nifty earnings grew 32% in 1QFY24, a beat vs. our expectations of 25%. Coverage Universe recorded the highest earnings growth in the last eight quarters (@52%), fueled by domestic cyclicals, such as BFSI and Auto. Healthcare delivered 24% earnings growth after six consecutive quarters of flattish earnings
- Aggregate earnings of the MOFSL Universe companies were in line with estimates and rose 52% YoY (vs. est. of +49% YoY). Nifty posted a beat with EBITDA/PAT growth of 22%/32% YoY vs. expectation of 18%/25%. Once again, the earnings growth was propelled by domestic cyclicals, such as BFSI and Auto. BFSI coverage universe recorded a 60% YoY profit growth while Auto posted a significant profit of INR179b (vs. a profit of INR13b only in 1QFY23). Ex-Tata Motors, the Auto Universe registered a healthy 83% earnings growth in 1QFY24 vs. expectation of 59%. OMC’s profitability surged to INR305b in 1QFY24 vs. a loss of INR185b in 1QFY23 due to strong marketing margins. Ex-OMC, MOFSL/Nifty’s earnings rose 19% YoY each vs. expectations of 12%/11%. Metals continued to drag the aggregates with a 40% YoY decline in earnings, led by Tata Steel (-92% YoY), Vedanta (-81% YoY), and Hindalco (-40%)
- Of the 22 sectors under Coverage, 8/8/6 sectors reported profits above/in-line/below our estimates. Of the 235 companies under our Coverage, 88 exceeded profits estimates, 87 posted a miss, and 60 were in line.
- The MOFSL Universe is likely to deliver sales/EBITDA/ PAT growth of 7%/22%/33% YoY in FY24. This continues to be a year where margin increase would drive growth. Autos, O&G, and Banks (Private and PSU) are expected to be the key growth drivers with 77%, 56% and 30% YoY earnings growth, respectively, and should contribute over 70% to earnings growth.
- After the quarter results, Nifty earnings estimate continue to be in the 1050 to 1100 range for FY25. While metals are a drag in FY24 and oil refining and marketing is pulling up the estimates, opposite could be true in FY25. Given that two commodity sectors are cancelling each other’s impact, the discounting range of 18-18.5xFY25 earnings for NIFTY should hold and we continue to target 20,000 levels on Nifty.
It is time for alpha: Result season for our key themes
Retail focused banks had a good season and banks like ICICI, Axis, IndusInd, IDFC, and AU SFB saw strong AUM increase. As expected, banks with significant corporate exposure saw a slowdown in AUM growth. Going forward, we believe, AUM growth would drive profits as the base effect has caught up.
Engineering and defense companies had a strong result season and reported good order inflows. Cable companies delivered better than expected results.
The healthcare space as a whole had a good quarter. Our focus area of hospitals performed better than expectations.
In China+1, while EMS companies did very well, chemical companies had a weak quarter on account of Chinese slowdown and inventory normalization. However, chemical prices seem to be recovering after the quarter and the outlook has improved.
Luxury consumption as a space did well. Hotels, malls, luxury retail, etc all saw continued strength. This was in contrast to the wider space where volume growth disappointed and bump in profits was mostly on margin increase.
Our choices in new tech companies delivered strong numbers with a sharp reduction in EBIDTA losses.
In the tech services space, mid cap tech companies, focused on better performing industry spaces delivered stronger growth vs larger cos.
Overall, the result season was strong for us. We had lower exposure to pharma which did well but made it up by being exposed to other performing spaces. Key driver of performance is earnings growth. In this quarter also, the broad market delivered better earnings growth vs Nifty (52% vs 32%) in a meaningful manner, indicating that it is time for alpha.
Trends in institutional Flows: Buying continues in August
- India remained the most sought-after destination for FPIs for the fifth month in a row in July 2023, with equity inflows of US$5.7bn. The inflows have been on account of some money moving away from Taiwan (selling of USD3bn) and inflows into India-dedicated passive (US$1.4bn, 25%) and active funds (US$0.9bn, 16%). Increasingly India funds are seeing inflows while today active funds make up only 2% and passives 4% of FII AUM, respectively. Non-India-dedicated active funds (77% of FII AUM) bought US$2.4bn and Non India passives bought US$1.0bn. FPI buying continued in Aug and was to the tune of USD1.01bn till 19 August. FIIs raised their overweight (O-WT) in financials by 22bps in July, in industrials by 29bps and in real estate by 10bps. FIIs raised their U-WT in IT by a large 48bps to 4.1ppt and their U-WT in autos rose by 7bps.
- On the domestic side, most of the equity scheme categories saw a MoM moderation in flows in July, other than multi-cap (+Rs16bn vs +Rs7bn) and sectoral funds (+Rs14bn vs +Rs5bn), which were helped by new fund launches. Balanced funds also saw a MoM rise in inflows from Rs8bn to Rs15bn. Domestic equity ETFs saw outflow of Rs2.9bn versus inflows of Rs28.3bn in July. Value/contra funds (+Rs7bn vs +Rs22bn), small-caps (+Rs42bn vs +Rs55bn) and dividend yield funds (+Rs3bn vs +Rs4bn) saw smaller MoM inflows. Insurance sold USD2.1bn over May-July but bought 0.7bn in Aug (till Aug 19).
- Overall, we believe that while domestic flows would continue, FPI flows should be expected to taper off given the increased US yields which makes EM equities less attractive. Effect of moves within the EM basket are difficult to forecast.
Valuations and summary: expect a period of consolidation
With increase in bond yields, we expect the growth style of investing to face head winds. Index target is just about 5% away and we continue to expect a period of consolidation. With corporate commentary being strong and with a strong result season, we don’t expect any sharp corrections. A quarter of time correction would result in valuation correction by 4% and should suffice to make equities competitive. We continue to believe it is time for alpha with earnings growth being higher outside the Index and high growth spaces continuing to deliver strong performance in particular.
May the Good Times Continue
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