Q2 results have been better than expected. For large-caps, it is marginally above the estimates with Nifty 50 PAT growing of 10% (excluding telecom) on a YoY basis against flattish expectations. While for the broad market like Nifty 500 it is much better with more than 20% on YoY basis and 10% on QoQ basis. This is due to cut in corporate tax, reduction in raw material cost, better than expected results from mid caps and sectors like Banks, NBFCs, Cement and FMCGs. Post Q2 we have noticed some upgrade in the rating of mid and small caps largely due to stability in valuation which is today below the long-term trend and in expectation of improvement in their business during FY21. We have also turned positive on oil and gas sector due to attractive valuation and expectation that divestment plans will revive the valuation of oil refinery and distribution companies. We also have a positive view on insurance and AMC sectors being in its early phase of business growth, led by low penetration leading to healthy business outlook in the long-term.
During the near-term, weak macros and premium valuation has been dictating the trend of the market which has turned muted compared to the last few weeks. This month we have released important data which shows heavy contraction in the strength of the economy. CPI has climbed to 4.65% above the RBIs average forecast which could impact the monetary policy in the medium-term. But RBI is likely to give more focus on growth rather than rising inflation in the near term. IIP steeply declined by -4.3% YoY in Sept, factory volumes and consumption spending are at decade lows. Q2 GDP will be announced this month-end which is expected to be below the actual 5% in Q1. RBI had forecasted a growth of 6.1% for FY20 which will be downgraded further, as market expects it to be around 5%. At the same time, Nifty50 is trading at one year forward P/E of 19x and 26x on 12 month trailing basis which does not provide much leeway to perform in the short-term.
In the last one-month market’s top 100 stocks are up by 3% while mid caps are outperforming with 5% return. This is because they are available at discounted valuation of 15x on a one year forward P/E and the strength of balance sheet has improved with better cash flow. This out performance is expected to be maintained in the long-term as risk taking ability and investment environment in equities has improved for investors. Lower interest rate has creating arbitrage opportunities, this is in spite of the economy being at its worst since it is largely factored in the market and is likely to do better in the coming year. The SC verdict on IBC case against Essar-NCLT issue is very positive for lenders giving an upper hand to creditors’ vs NCLT and business owners (The National Company Law Tribunal). This is expected to bring faster resolution to stressed assets and improve business ethics to uphold the ease of business in the country. Given this scenario, we may see limited downside for Nifty 50 despite premium valuation. Market may be range bound in the next one to two weeks, with a range of 11,600-12,000 for Nifty 50.
Posted: 21 November 2019.