The ripples of volatility, lack of trigger…


The market continues to bear the volatility given the premium valuation, Nifty50 was restricted about four times at 10,950. NSE500 is trading at a trailing P/E of 26x which is marginally above its five years average. The possibility to maintain this premium valuation is low, as the domestic economy is slowing down, high and low was 30x and 15x. As per Central Statistics Office (CSO), economy is expected to slowdown in H2FY19 with GDP growth of 6.8% compared to 7.6% in the first half. On a step-by-step basis, the market is downgrading earnings expectation as the result season approaches. Now it has a muted expectation on Q3 and Q4, which is inching up the valuation gap.

Q3 results have started and the initial outcomes from IT and Banks are below expectation, impacting the market this week. Margins of IT blue chips were below par due to higher offshore subcontracting and employee cost, but the long-term trend of business outlook was marginally upgraded. Digital business for the quarter continued to perform well with revenue contribution increasing to 30% (28% Q2FY19) for TCS and 33% (31% in Q2FY19) for Infosys. This was driven by strong traction in demand across cloud, IoT (Internet of things), cyber and data analytics. Revenue growth was solid at 20% for both Infosys and TCS. Infosys has revised its constant currency (CC) revenue estimate to 8.5-9%YoY (6-8% earlier) while TCS maintained the double-digit growth guidance.

On a similar note, the start to banking sector results was mixed, lending and deposit growth are high but NPAs continue to popup more than expected. Bandhan and IndusInd grew lending by 46% and 35% YoY. For Karnataka Bank and J&K Bank, the loan growth was 20% YoY. At the same time, the deposits have grown by around 30% and 20% for Bandhan and IndusInd respectively. These numbers cater well for higher top line growth and brighter outlook in the long-term, but the issue in the short-term is hike in NPA. As per the RBI data, the lending activity has increased by 15.1% YoY in December, while the deposits grew by 9.2% YoY during the same period, with credit-to-deposit ratio reaching a 47 year high of 78.6%. Lending to NBFCs by banks has increased during tight liquidity situation.

The market was expecting 15% and 22% growth in Nifty50 EPS for FY19 and FY20 respectively. The actual EPS growth in H1 is about 8% and given a slowdown in business in H2, this expectation is at risk with downgrade in earnings growth. We understand that this expectation will taper to sub 10% and 20% in FY19 and FY20 respectively.

In the last two days, the market was inching up supported by some stability in the global market and tax & rate cut in China. Importantly, domestic market is supported by a huge ease in CPI inflation to 2.19% (Dec). Fall in 10yr yield and moderation in inflation is providing hope in the market that RBI will ease its monetary policy. Having said that, RBI had recently confined its stance to ‘calibrated tightening’ in expectation of volatility in global bond yield, oil prices and lack of domestic liquidity. To change this stance so early may not value well for the institution. But the head of the institution has changed, its relationship with the Government has improved and data is supporting, and it will be interesting to see how the new Governor manages the situation.

Posted on: 17 January 2019.


  1. Between Infosys & TCS which should one choose for one year time frame.Likewise, since you don’t see clear or complete resolution of NPA s , which among public or private sector can truly outperfom ?

    • TCS has been our top pick and we continue with that view. Strong order-book/pipeline, robust commentary and traction in digital, the company will continue to trade at premium valuation. Currently we have a ‘HOLD’ rating on the stock with a revised rolled-over TP of Rs. 2,036 based on 20x FY21E EPS. In the mid-size IT companies we prefer HCL Tech and Mindtree.
      NPA’s have shown a decline in the last 2 quarters to reach 10.58%/14.12% for all scheduled commercial banks (SCBs) and Public Sector Banks (PSBs) respectively, after touching a peak of 11.18%/14.58% for SCBs and PSBs in FY18. But still, the NPA’s of PSBs stand at much higher range compared to the Private Banks. Also, going ahead, the slippages from MUDRA loans will also play a role in the NPA’s of these banks. We expect most of the issues of various private sector banks with RBI would get sorted out in a reasonable time, and we give more weight to private sector banks compared to PSBs. We expect HDFC Bank, Kotak Mahindra and Federal bank to perform better compared to peers.

  2. giving little glimps of the upcomming market in general. but it is not clear about the small&mid space in which middle class stuck. futuristic scinario?

    • Retail investors have been impacted due to higher exposure in Mid & Small-caps. Whereas, Mid & Small caps were hugely impacted by a change in SEBI’s category and definition of Market cap. Further implementation of ASM system (Additional Surveillance Measure) impacted liquidity of small and micro stocks . A large restructuring by mutual funds to bring it in-line with objective of its respective schemes led to reduction in their exposure in Mid & Small caps. A reverse will emerge since the restructuring is over while valuation of many stocks have turned attractive today. New schemes, higher MF inflows and return of earnings growth in the economy by the second half of FY20 will bring midcaps back to the limelight. But please stick to quality and not to microcaps basing to its small prices, quality of business and management is most important. Risky proposition should be a portion of your portfolio (5% – 25%), which is dependent on the risk-averseness of the individual.


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