Motilal Oswal said that the outcome of the Gujarat elections will be a key trigger for the markets.
After hitting a record high of 10,490.45 (on November 6), the 50-share NSE Nifty has been consolidating in the 10,000-10,500 band as investors await a key event — the results of the Gujarat assembly elections.
Likely status quo on rates by the Reserve Bank of India on Wednesday and an expected last rate hike by Federal Reserve next Wednesday have already been discounted by the market. What is not priced in is the commentary from central banks.
The consolidation in November, after a stellar 5.6 percent rally in October, indicated that investors already digested second quarter earnings and are hoping for revival from the second half of FY18 onwards.
After a long time, July-September quarter earnings did not disappoint, Motilal Oswal said, adding sales, EBITDA and profit for its Universe (ex-oil marketing companies) increased 10.4 percent, 13.9 percent and 9.2 percent against expectations of 10.9 percent, 10.9 percent and 11.7 percent, respectively.
More importantly, the quality of earnings was far superior compared to the previous few quarters, it said.
The research house further said that expectations of an earnings revival in the second half of FY18 and FY19 would keep sentiment positive, but the crude oil price, which has rallied and is now in the USD 60-65 a barrel band, can act as a source of worry if prices were to rally further.
The government does not have the fiscal room to manage any sudden spike in crude prices (fiscal deficit has reached 96 percent of budget estimates in the first seven months of FY18), it feels.
Nonetheless, India’s macros have remained healthy on balance, Motilal Oswal said.
Apart from earnings, Moody's India rating upgrade and better September quarter GDP data also aided sentiment in the month gone by. FIIs were net buyers for the second straight month (USD 3 billion) and DII flows were robust (USD 1.4 billion) in November.
Midcaps (up 1.6 percent in November, after an 8 percent upmove in October) outperformed the Nifty, led by robust DII flows, and continued to command a rich premium of 62 percent versus large caps, Motilal Oswal said.
Among sectoral indices, Real Estate hogged limelight, rising 6 percent, followed by Technology (up 4 percent), Media (3 percent), PSU Bank (2 percent), Private Bank (2 percent) and Consumer (1 percent). Seven sectors delivered negative returns in November.
Not only Motilal Oswal but every other brokerage house said the key near-term trigger is the outcome of the Gujarat elections, which could provide an indicator about the 2019 general elections.
The research house feels that a BJP victory will be cheered by markets; but the latest opinion poll raised some concerns over the likelihood of a saffron surge.
The ABP News- Centre for the Study of Developing Societies (CSDS) opinion poll shows a tough fight for Bharatiya Janata Party (BJP) in Gujarat. The state is slated to go to polls in two phases — on December 9 and 14. Results will be declared on December 18.
The Bharatiya Janata Party (BJP) continues to have an edge over the Congress even though their vote share might be tied at 43 percent each, said a report quoting an opinion poll conducted by ABP News and Lokniti-Centre for Studies of Developing Societies (CSDS) projected on Monday.
According to the forecast, the BJP is likely to get 91-99 seats, while the Congress may get 78-86 seats in the 182-member state assembly, it said.
India is the best performer in current calendar year. For CY17 year-to-date, MSCI EM (up 30 percent), India-Sensex (24 percent), Korea (22 percent), Brazil (19 percent) and Japan (19 percent) were the best performers among the key global markets in local currency terms.
In dollar terms, India has delivered 31 percent returns in YTD CY17. On the other hand, Russia (down 15 percent) has delivered negative returns.
Over the last 12 months, MSCI EM (up 30 percent) has outperformed MSCI India (up 23 percent). However, over the last five years, MSCI India has outperformed MSCI EM by 62 percent.
Some of the themes that Motilal Oswal likes from CY18 perspective are shift from retail to corporate lenders; consumption revival; cyclical recovery in infrastructure; contra play in pharma; and dawn in telecom sector.
In the consumption space, a revival is expected in second half of FY18, the research house feels.
After three years, the consumer sector seems to be on a revival path on the volumes growth front, led by rural growth, which is expected to spur overall volume growth for the next few quarters, it said.
In a pleasant surprise, Q2FY18 results saw positive commentary from the managements of FMCG companies: rural growth already tracking ahead of urban growth before the benefits of near-normal monsoon started to come through.
This is for the first time in many years that all the three levers of sales for FMCG companies – volumes, pricing and premiumization – are favourably aligned, unlike earlier years, where rural volumes were depressed, led by drought in FY15/FY16 and demonetisation in FY17; and commodity costs were deflationary, the research house said.
Near-normal monsoon this year, extension of Direct Benefit Transfers, rising rural wages, higher increase in MSP in the current year compared to the preceding five-year average, and potential sops for rural consumers ahead of general elections in 2019 all augur well for rural demand, it added.
Urban discretionary demand also seems to be recovering, based on the results and management commentary in Q2FY18, it feels.
"Adjusted PAT growth estimate for our consumer coverage universe for FY19 and FY20, at a 17.1 percent CAGR (FY18-20), is the highest since FY13 and far higher than the 9 percent average over FY14-18," Motilal Oswal said.ICICI Bank, Sun Pharma, SBI, Coal India, Emami, Titan, Shriram Transport Finance, Bajaj Auto, RBL Bank and Indraprastha Gas are some of its preferred bets.