Presentation on Equity Markets 15 th Jun 18
Four Pillars of Indian Equity Market Macros Flows Earnings Valuations
Broader Macros: Could weaken (due to crude & twin deficits) Source: Kotak Institutional Equities (KIE) 3
Domestic Macros: Update May CPI Inflation has firmed up further to 4.87%. Core inflation at 6%. RBI first rate hike since 2014. One more rate hike likely in August. RBI policy stance is neutral. Need to watch out for MSP hikes. IIP at 4.9% aided by 13% y-o-y growth in capital goods production Higher current account deficit at 1.9% in Q4FY18. Rupee to remain weak in FY19 if crude remains at elevated level. Monsoons to be normal. Positive for Auto/FMCG/Agrochem. Government spending could get fast tracked (Roads/Railways/Ganga cleaning 4
Global Updates US economy remains strong. Unemployment at low levels. Fed rate hikes. Negative for foreign fund flow into emerging markets ECB rollback of QE program Crude continues to remain at elevated level. Trade related issues between US and China/EU On the positive side, geopolitical issues are seen easing 5
Micros: Mixed, but improving Cement, commercial vehicles, two wheelers, services credit offtake and airport traffic showing improving trends Source: Kotak Institutional Equities (KIE) 6
Flows: Pillars of Indian Equity Market MF inflows very strong at USD 8.8 bn in CYTD led by strong SIP flows into equity MFs. FII flows very poor. Source: Kotak Institutional Equities (KIE) Source: SEBI website 7
Flows: Indian better than others India better off than other EMs and Asian markets (in CYTD flows). India fared better even in CY17. Source: Kotak Institutional Equities (KIE) 8
Earnings: Aggressive future estimates KIE is building in Nifty earnings growth of 23% in FY19E and 19% in FY20E. Numbers look aggressive but the base of FY18 is very low. Expect RoEs to improve to more than 15% in FY20E (from 12.7% in FY18). Source: Kotak Institutional Equities (KIE) 9
Valuations: Global comparison India looks expensive on absolute and relative basis Vs other markets. However, if India s high earnings growth forecasts materializes then on PEG* basis it can deserve to trade at premium valuations. Source: Kotak Institutional Equities (KIE); PEG stands for Price/Earnings to Growth 10
Nifty Valuations: On the higher side Nifty valuations are rich at 18x Fw PE but not in bubble zone. Further re-rating looks difficult. Source: Kotak Institutional Equities (KIE) 11
Valuations: Earnings Yield Vs. Bond Yield Bond Yields are far higher then Earnings yield. This puts Equity market valuations at risk. Source: Kotak Institutional Equities (KIE) 12
Mid Cap Vs Nifty Valuations Orange line in the adjacent graph is the Mid Cap Fw PE and light Green is Nifty Fw PE (both are on rolling 12 months Fw earnings). The Mid Cap Fw PE is still very high as compared to the Nifty (even after the sharp correction). The reason could be a sharper reduction in forward estimates of Mid Cap companies. The Mid Cap Index is still trading at more than 15% premium to the Nifty (in terms of Fw PE). Source: Bloomberg 13
Investment Strategy Returns to be based on earnings delivery rather than PE expansion. Several midcaps have corrected in 2018. - Additional Surveillance measures by SEBI, Corporate governance issues & Auditor related issues. Need to be very selective while choosing midcaps. Focus on Good management, superior earnings growth & reasonable valuations. Apportion larger allocation towards large caps (that too in safer names). Preferred Sectors: Automobiles, Pharmaceuticals, Agro Chemicals, Housing Finance, Metals and Infra & Construction. 14
Stocks: Research Recommendations Source: Kotak PCG Research & Kotak Institutional Equities (KIE) Kotak Securities - Private Client Group - Path: Login to www.kotaksecurities.com > Research > Equity Reports > Stock Recommendation Snapshot Kotak Securities - Institutional Equities - Path: Login to www.kotaksecurities.com > Research > Equity Reports > India Daily Institutional Equities Research Report 15
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FUNDAMENTAL RESEARCH TEAM Sanjeev Zarbade Ruchir Khare Jatin Damania Jayesh Kumar Capital Goods, Engineering Capital Goods, Engineering Metals & Mining Economy sanjeev.zarbade@kotak.com ruchir.khare@kotak.com jatin.damania@kotak.com kumar.jayesh@kotak.com +91 22 6218 6424 +91 22 6218 6431 +91 22 6218 6440 +91 22 6218 5373 Teena Virmani Sumit Pokharna Pankaj Kumar K. Kathirvelu Construction, Cement Oil and Gas Midcap Production teena.virmani@kotak.com sumit.pokharna@kotak.com pankajr.kumar@kotak.com k.kathirvelu@kotak.com +91 22 6218 6432 +91 22 6218 6438 +91 22 6218 6434 +91 22 6218 6427 Arun Agarwal Amit Agarwal Nipun Gupta Auto & Auto Ancillary Logistics, Paints, Transportation Information Technology arun.agarwal@kotak.com agarwal.amit@kotak.com nipun.gupta@kotak.com +91 22 6218 6443 +91 22 6218 6439 +91 22 6218 6433 TECHNICAL RESEARCH TEAM Shrikant Chouhan Amol Athawale shrikant.chouhan@kotak.com amol.athawale@kotak.com 91 22 6218 5408 +91 20 6620 3350 DERIVATIVES RESEARCH TEAM Sahaj Agrawal Malay Gandhi Prashanth Lalu Prasenjit Biswas, CMT, CFTe sahaj.agrawal@kotak.com malay.gandhi@kotak.com prashanth.lalu@kotak.com prasenjit.biswas@kotak.com +91 79 6607 2231 +91 22 6218 6420 +91 22 6218 5497 +91 33 6625 9810 17
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By referring to any particular sector, Kotak Securities Limited does not provide any promise or assurance of favourable view for a particular industry or sector or business group in any manner. The investor is requested to take into consideration all the risk factors including their financial condition, suitability to risk return profile and take professional advice before investing. Such representations are not indicative of future results. 19
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