Stock markets have been on a high ever since election results. The much-awaited event of 2019 came to its conclusion on 23rd May with BJP emerging as the single largest party and also moved closer to securing a simple majority in the Upper House of Parliament, aiding its ability to pass key legislation.
With the election uncertainty out of the way, cyclicals made a comeback in the month of May. But, how are markets placed today in terms of valuations? The answer may not make you happy. According to Anoop Bhaskar, Head – Equity, IDFC AMC, the Nifty valuations are ‘rich’.
There is a lot of hope that is fuelling the stock rally. Macros seem to be easing a bit, but the pressure to perform remains. So, all eyes are on corporate earnings.
Listing out the positives, Bhaskar says that though corporate banks (viz, ICICI, Axis and SBI) earnings somewhat disappointed for 4Q, the miss was driven by rising coverage ratios. Slippages moderated and FY20 earnings were actually upgraded.
In the industrials, especially construction companies continued to report robust numbers and order books. This is heartening.
“Consumer discretionary, more so linked with the urban consumer, seems to be less impacted as yet,” says Bhaskar.
Also, importantly cement companies finally started seeing some realisation improvement, which has resulted in upgrades of 2-5% for reporting companies.
Coming to negatives, autos are a pain point. Weak auto sales are well known and this has raised concerns on a broad consumer slowdown, points out Bhaskar. Auto companies had a weak quarter, as weak volumes and high inventory led to a higher discount. Margins saw a 1-5 percentage point hit, driving downgrades across the board.
“Staples companies had weak-to-in-line volume growth. On the demand side, staples companies said that conditions worsened from Jan-Feb to Mar-Apr, partly as rural consumers have seen a softening,” Bhaskar adds.
Three of the four large IT companies, viz, TCS, Infosys, and HCL Tech., gave growth guidance/outlooks implying 9-10% revenue growth in FY20. Margin outlook is weaker on account of INR appreciation, higher employee costs and supply pressures in the US, says Bhaskar.
Post the election verdict, market sentiments have improved even as underlying macros appear mixed with GDP growth coming in at a 20-quarter low, while crude oil fell sharply. The slowdown in consumption across staples and discretionary, mainly autos, was a key concern flagged by most of the companies. “However, seasonally strong consumer discretionary spends –air conditioners, coolers recorded strong growth boosted by a hot summer. Hence the outlook on growth remains a mixed bag,” the IDFC AMC investment expert says.
In a repeat of the previous NDA victory, crude oil prices have again corrected ~USD10/barrel. This was one of the key pressure points for Indian macros till now. Inflation remains under control, paving the way for another rate cut in the June RBI monetary policy.
“Of the various factors needed for Cyclicals and Mid and small Cap outperformance, quite a few are in favour namely – favourable valuations, crude prices closer to $60, yields below 7% and last but not the least a stable government at the centre. Improvement in domestic and global growth outlook can be a key trigger for the broader markets going forward, though the NIFTY may not see a significant uptick,” predicts Bhaskar, sharing key insights in his June 2019 outlook.
Valuations for the Nifty, meanwhile, remain rich at 20x FY20E EPS. From the peaks of January’18, Small Caps (-28.7% YoY) and Mid Caps (-14.9% YoY) have significantly underperformed the NIFTY (+14.3% YoY) and are trading at cheaper valuations relative to NIFTY. This is in marked contrast to the position in Jan-18 when the NIFTY was trading significantly cheaper to the mid and small cap indices, he added.