EQUITY MARKET MARKET OUTLOOK SEPTEMBER 2018 WHAT WENT BY

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Kellie Owens
5 years ago
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1 MARKET OUTLOOK EQUITY MARKET SEPTEMBER 2018 WHAT WENT BY US Dollar sees strength; as other EM currencies weaken: The Dollar Index was up 0. for the month while most EM currencies depreciated against the USD. The Turkish Lira was down 24.9% MoM which had a contagion effect on other EM currencies with the Russian, Brazilian and South African currencies falling 7.3%, 7.3% and 9. respectively. The INR too was down 3.3% and was one of the worst performing Asian currencies. The move out of Emerging Markets has been an on-going phenomenon since the start of the year with most of the EM currencies depreciating. YTD, too the INR has been one of the worst performing Asian currencies falling 9. as compared to the fall in the Chinese Yuan of 4.. Other BRICS have fared worse with the Russian, Brazilian and South African currencies falling 14., 18.3% and 15. respectively. The Turkish Lira and Argentinian Peso have been at the centre of this Emerging Market rout falling 42. and 49. respectively. Oil rebounds after last month s breather: WTI and Brent gained 1. and 4.3% MoM respectively, with the Brent closing at $77.4/barrel. Brent and WTI are both up ~5 on a YoY basis which is a key risk for an oil import dependent country like India. Most of the base metals saw a correction in the month with Zinc falling 6.4% followed by Copper (- 5.2%). On a 1-year basis, Steel (+1.3%) and Aluminum (+1.4%) are marginally higher on a YoY basis whereas Zinc (- 21.) and Copper (-12.) are below last year levels. The negative correlation between commodities and the Dollar seems to be finally playing out in metals but not so much in oil as yet. Emerging Markets volatile, while Developed Markets continue to surge: The MSCI Developed Markets Index rose 1. MoM led by the US (+3.), whereas the Emerging Market Index was down 2.9% - a large part of which can also be attributed to the currency depreciation across EMs. India was down 0. MoM in USD terms, in the middle of the pack as compared with other Emerging Markets. On a 1 year, basis India (+10.) lags the MSCI DM Index (+11.) but is significantly ahead of the Emerging Markets Index (-2.9%). Within emerging markets, China (-21.9% YoY) was the significant underperformer, bringing down the EM Index due to its outsized weight. Domestic Markets: Domestic equity markets continue to move up, despite the concerns on the currency and the external sector. The Mid Cap Index beat the NIFTY Index after a gap of several months - for the month, NIFTY, NSE Mid Cap and NSE Small Cap rose 2.9%, 5. and 2. respectively. YTD the 3 indices have given returns of +10.9%, -5. and -15. respectively. On a sectoral front, Pharma (+13.2% MoM) and IT (+8.4% MoM) were the outperformers, both export oriented sectors expected to benefit from the current bout of Rupee depreciation. IT has been the key outperformer over the last year with a return of 49. as compared to 17. for the NIFTY Index. Growth: 1Q GDP growth rose to 8.2% with strong manufacturing & agricultural activity, while growth in services sector fell due to weakness in trade & hotels segment. June IIP rebounded to 4-month high of. Inflation: Jul CPI reached 9-month low of 4.1 undershooting market expectations. Core inflation moderated marginally to 6.3% from 6.4 previously. WPI eased to 5.09% in July on account of lower food prices. Monsoon: IMD data reported that more than 4 districts in South India witnessed deficient rainfall, with TN being the worst hit state despite excessive precipitation in Kerala. At country-level, 2 rainfall deficiency was seen in East and N East, -3% & - in N West and Central India respectively. Southern peninsula saw more rainfall than normal.

2 Policy: The 25bps repo rate hike and neutral forward guidance by RBI in Aug policy meet, was in-line with market expectations. While maintaining a neutral stance, the Indian Central bank, wants to keep its options open in light of increasing global uncertainty. Trade Deficit: July trade deficit deteriorated further to US$ 18bn (highest since May 13), despite gold imports coming down to US $3bn in July (vs US$ 7.7bn in May 13). The deterioration in trade deficit despite a fall in gold imports and lower comparable crude oil prices (Crude oil was above $100/barrel in May 13) could point to a smart pick up in domestic capex (mainly solar power) as well as consumption. Fiscal deficit worsened with Apr-Jul FY19 fiscal deficit standing at 8 of FY19BE. Capital Flows: FII were net buyers in Aug with inflows of $101mn with YTD total of $313mn outflows. DIIs continue to remain buyers with $403mn inflows led primarily by mutual funds, taking the YTD total to ~$10.5bn. Mutual Funds were net buyers of $546mn in Aug while Insurers remained sellers with net outflows of $143mn. Q1 FY 19 earnings season begins on a strong note: 191 of the BSE 200 companies have reported till date. Of the remaining companies, 6 are NBFCs which will report later on account of switch to IndAS and 2 are FMCG companies Gillette and P&G which have a June year end. 3 BSE200 Sales Gr YoY, ex Financials 2 3 BSE 200 EBITDA Gr YoY, ex Financials 2 1 9% 1 12% % BSE 200 PAT Gr YoY, ex Financials 3 BSE 200 PAT Gr YoY, incl Financials % 2% -3% % -4% Broadly, results across the board are encouraging; with healthy beat to estimates across sectors. Though growth looks optically high due to the GST-impacted base of Q1 FY 18, the numbers are broadly better than estimates and demonstrate a good growth even over Q1 FY 17. Headline BSE200 PAT has grown 8.4% (2. CAGR since Q1 17), but optically marred by corporate banks, one-off in Tata Motors and losses in Telecom on account of competitive intensity. Digging deeper into the numbers, ex Financials, Sales, EBITDA & PAT have grown at a healthy 1, and 24% respectively. PAT, ex Financials, Tata Motors and Idea was up. Charts attached reflect a healthy recovery in Sales

3 and EBITDA Growth, ex Financials. Over Q1 FY 17, Sales, EBITDA and PAT ex Financials is up, and respectively on a CAGR basis. Stable sectors continue to report healthy numbers with, 24% and respectively Sales, EBITDA and PAT growth, ex Financials for the stable segment (Retail Banks & NBFCs, Auto, Consumer, IT & Pharma). Including Retail banks, PAT growth for the stable segment stands at YoY ( CAGR since Q1 17). Sales growth looks muted and is optical Sales for traded goods, till implementation of GST were reported Gross of excise as compared to net of GST post the GST implementation. Over Q1 FY 17, Sales, EBITDA and PAT for Stable sector are up, and respectively on a CAGR basis. 3 Stable segment Sales Gr, ex Financials 2 3 Stable Segment EBITDA Gr, ex Financials 2 24% 1 1 4% 1 2% Stable segment PAT Growth, ex Financials 3 Stable Segment PAT Gr, incl Financials % - 3% 4% Cyclical segment on the other hand, has seen an uptick in Sales & EBITDA, though PAT growth is volatile and marred by corporate bank provisioning, increasing losses in Telecom and one offs in Tata Motors. Ex Financials, Cyclical segment Sales, EBITDA and PAT grew, and - respectively. Adjusted for one-offs (Tata Motors & Idea) PAT growth was around 1. Over Q1 FY 17, Sales, EBITDA and PAT for Cyclical sector are up 1, and respectively on a CAGR basis. Though PAT growth is muted, EBITDA growth for Cyclicals, even over a 2 year period is up an impressive which points to a recovery in operating metrics for these companies. 3 Cyclical segment Sales Gr, ex Financials % 3% 3 Cyclical Segment EBITDA Gr, ex Financials

4 3 Cyclical segment PAT Growth, ex Financials 3 32% Cyclical Segment PAT Gr, incl Financials - -4% % On a sectoral basis, Commodities (+73% YoY), Energy (+404 YoY), Consumer Discretionary (+4 YoY) and Healthcare (+4 YoY) led the PAT growth for the quarter whereas Telecom (losses), Corporate Banks (-16 YoY, ie losses) and Cement (- YoY) were the key negative contributors. Key takeaways from sectoral results Urban discretionary sentiments are seeing a significant improvement. While a low GST base has helped, several urban-biased companies like Westlife, Jubilant, Nestle and Asian Paints significantly surprised on the upside. Interestingly, on the rural side, growth for staples and 2-Ws seems to be higher for companies like HUL, Dabur and Hero specifically highlighting faster rural growth. The housing recovery theme is also tracking well. Pre-sales growth for most developers was well into double digits with management commentary indicating broader recovery now. Also, cement companies showed strong doubledigit volume growth though pricing continues to be weak. Exporter performance is recovering. IT companies had mostly mixed results in 1Q; however, management commentary on demand in the key US market was positive. The healthcare sector also did well, showing signs of stabilisation in US businesses, as volumes from new launches make up for price slippages now. Bank NPLs: Asset quality seems to be stabilising; weak NIMs were a bother (c.10-20bps contraction), even across top-quality private retail banks. The positives Jubilant/Westlife: 2/24% same-store sales growth recorded by the two companies drove 12%/33% upgrades to FY19 earnings. TCS: 4. constant-currency QoQ revenue growth was the best 1Q in four years. Sun Pharma: Stronger-than-expected India and US (+3% QoQ) growth seen. PSU Oil & Gas: Weak refining GRMs notwithstanding, the PSU oil companies enjoyed large inventory gains on rising oil prices, driving 6-12% upgrades for HPCL/IOCL. Metals: Strong steel pricing drove /1 earnings upgrades for Tata/JSW Steel. The negatives Autos: Except M&M, estimates for all auto companies were revised downwards. The 2- W sector disappointed on margins with a combination of rising raw material prices and higher discounts in the domestic market driving earnings downgrades of 6-. Cement: Though the volume performance and 1Q average realisations were good, spot cement prices are much weaker than anticipated on weaker industry discipline, driving 8-4 earnings cuts across cement manufacturers. ACC and Ambuja performed well. Telecoms: Pricing pressure continued across the industry due to the Jio onslaught, with ARPUs for incumbents declining to multi-year lows. Reliance ARPUs were ahead of estimates, leading to an earnings upgrade for Reliance Ind. On an absolute basis, Corporate Banks posted a loss of Rs 5,400 crore as compared to a profit of Rs 8,100 cr in Q1 FY 18 and a quarterly run-rate of Rs 13,000 cr. The swing in corporate bank profits is expected to be the key contributor to earnings growth going forward.

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Equity Update October 2018

Equity Update October 2018 Market Overview (as on September 28, 2018) Flows Sept-18 Aug-18 July-18 FIIs (Net Purchases / Sales) (Rs cr) MFs (Net Purchases / Sales) (Rs cr) Domestic Markets Macro Indicators GDP (YoY%) IIP (YoY%)