The Q1FY20 result was marginally below the expectation. A preview analysis for the key index Nifty50, suggested 11% growth in PAT on a YoY basis while the actual has been 7%. Though it is a bit low, the key issue is that earnings expectations are very high for the full fiscal year 2019-20, hoping for a revival in the economy by the second half of the fiscal year. In terms of macro forecast, GDP growth has been downgraded to 6.9% from 7.4% for FY20 six months ago with further downside risk. Based on the recent economic data and management commentary, it is inferred that the muted pace of business outlook may continue for some more quarters. Wholesale Price Index has plummeted to a new low of 1.1%, which is negative for business reflecting weak demand and growth in prices. Market was hoping for more than 20% growth in earnings in FY20, which has been corrected by about -5%. We cut our earnings forecast to 15% YoY. As a result, we further cut the one-year-forward target for Nifty50 to 12,000 from 12,400 before Q1. We are maintaining the one-year-forward P/E of 17.5x in anticipation of new measures by the government to support the economy, positive inflows from mutual funds and no recession in the global economy.
The valuation band can reduce if the outlook does not improve in the next quarter or global market advances to a recession. Risk of recession is the key discussion in the global financial market today. Recently, the US treasury yield hit a 2.5 year historic low of 1.53%, fearing that a global slowdown could tip the US economy to a recession. In the last Fed policy meeting on 31st July, interest rate was reduced by 25bps to the range of 2 – 2.25%, the first rate cut since the financial crisis. Federal Reserve Chairman Jerome Powell said the Fed will ‘act as appropriate’ to sustain expansion. He also added that he does not view this as a move to start a long series of rate cuts but rather as a one-time decision. On that day, 10 year yield was stable marginally cut by 5bps and closed the quarter at 2.01%. But since then bond yield has turned extremely volatile and lowered by 51bps in the last three weeks. The market is concerned that trade-war, Brexit, geo-political issue in Argentina and Italy are slowing the world economy. US GDP for the quarter of July 2019 has slowed to 2.4% from 3.2% last year same quarter. It seems a lot has changed since the speech, and market will now cautiously wait for Powell’s keynote speech at the annual policy conference in Jackson Hole on Friday. A dovish view will be considered positive by the market.
At home, market is waiting to see the steps to be undertaken by the government. PMO and FMO are working on measures to boost the economy. Though there is optimism, the risk is that the fiscal position of the government is weak, reducing the chances of an come-out with action-packed stimulus. As a result, the market is range-bound today with a negative bias, bold reforms are the way to rebound.
Posted: August 2019