We expect FY20 to be better than last year…

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Market has been good in the last one and a half months. We expect FY20 to be better than FY19 in which mid and small caps are likely to outperform supported by revamp in business and improved liquidity from FIIs and DIIs. India has been at a premium valuation for a long time which is likely to be maintained, supported by higher inflows from FIIs and reduction in cost of equity, being the fastest and largest growing economy in the world. Volatility will emerge in-between the finalization of US-China trade deal and national election outcome, since this will define the final effect on FY20.

Having said that forecasting the main indexes has been a tricky business in the last two to three years, as it has not been showing the true trend of the broad market, rather it has been showcasing a skewed picture lead by a set of blue-chip stocks as liquidity continued strong on these stocks. We had started this year with a one-year target of 11,750 for Nifty50, which has marginally increased to 12,000 today. This is in spite of downgrade in earnings growth post the mixed result of Q3FY19. The increase in target deflect the increase in PE valuation from 16.5x to 17x on FY21 EPS due to improvement in outlook. Nifty EPS for FY19 is expected at Rs523 and Rs615 for FY20. On a one year forward basis, Nifty is trading at a premium valuation of 19x, a similar trend of skewed performance may prevail.

Mid and small caps have managed-well during the previous period of slowdown in business with tight liquidity and SEBI norms which impacted their valuation and growth. Post this under performance, valuations have turned attractive being below the averages while outlook has improved. Instances like stability in domestic economy, possible gain from last reforms, post-election normalization, reduction in domestic interest rate, pick-up in credit growth, and reduction in global bond yield leading to higher inflows from foreign investors are likely to deeply benefit India, in which mid and small caps will outperform.

We are more positive on domestic oriented businesses, in-terms of sectors, we are positive on banks, cement, infra, chemicals and consumption. Banks, because of normalization in NPA issue, capital infusion, start of credit growth and reduction in interest rate cycle in the coming year. Cement and infrastructure, because of capital expenditure post-election, reduction in the cost of operation and funding, and attractive valuation. Chemicals, due to disruption in China generating opportunity for Indian exports while consumption, as a long-lasting story for India given the aspirational class of urban and rural market, having said that valuation is not attractive across the consumption sector, stock specific will be the key to make money above the market returns.

The global factors which can impact negatively on this expectation are; if economy falls into a recession than a slowdown, delay in US-China deal, structural issue in EU and post effect of BREXIT. The negative factors for India could be; a fragile hung parliament and further than expected time for recovering from the NPA issue impacting private spending.

Posted: April 4, 2019.

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