Apr 5, 2017
A Reversal of Fortunes
The reversible is ironic. In past years, FIs have been attributed as the smart money that bought the bottom while retail, the dumb money that capitulated at the worst times. Recent experience suggests otherwise. FIs exited the market en masse in the great rotation of year end 2016, elated by a Trump victory and fearful of the impacts of demonetisation.
Wrong on both counts. As realisation has set in that the fiscal stimulus and tax cuts look further out than the consensus expected, FIIs have now realised what domestic investors know. Which is that the Indian market is a structurally attractive market. FIs are now back, pumping money into Indian markets be it either equity or debt. Meanwhile, domestic equity markets have roared, driven higher by DIIs and mutual fund purchases.
From Oct to Dec-16, FIIs pulled out ~INR 31,800 Cr. while from Jan to Mar-17, ~INR 43,700 Cr. came back into the system. This was mainly rear-end loaded buying in Mar-17, in effect leaving FIIs net buyers over the last 6 months. The DIIs and MFs on the other hand had a better read on the underlying health of the markets and remained steady net buyers of Indian equities over last 6 months, albeit their vigour has modestly ebbed in last 3 months. The same story holds true for the Indian debt market, where MFs have demonstrated sustained vigour in accumulating more Fixed Income assets which has led to a downwards correction in 10-year yields seen in the last few weeks.
Despite Indian markets trading at premiums to 3 year historical averages, we have not yet crossed peaks seen in Sep-16. Better than expected Q3FY17 earnings results have provided the impetus in large measure, supported by strong inflows and the anticipated hope of an even more robust year end performance. The RBI’s monetary policy meet on 6-Apr-17 may also shape the course of events, particularly on the inflation front.
FY18 earnings revisions for the market in the past three months have been neutral to slightly negative. Revisions to the upside are being led by Energy and Utilities, followed by Industrials and IT. Earnings announcements start the next week with Infosys slated to kick things off on 13-Apr-17.
Earnings Revisions for the Nifty 50 In the Past Three Months Have Been Mixed
Attribution for Last Quarter and Year
We review the performance of the Nifty 50 and CNX 500 indices to get insights into what worked and did not work in the quarter as well as the year ending Mar-17.
Nifty 50 Performance Attribution
Nifty 50 Performance Review
31 out of 50 Nifty 50 stocks beat our hurdle return of 12%; however, the dispersion in returns was wide. Hindalco was the top performer with a 121.8% return over the past one year, while Infosys was the worst performing stock in the index with a negative 16.1% return. During the quarter, Indiabulls Housing Finance led the way with a 53.4% return while Dr Reddy’s was the worst performer with a -14.0% return. Materials and Financials were the strongest performers during the quarter, while Financials, Energy and Utilities were the strongest performers over the one year period. Additional notable top performers in the quarter were Yes Bank, IndusInd Bank and Adani Ports.
CNX 500 Performance Review
Trends seen in the Nifty 50 held true for the broader index as well. Materials, Financials, Industrials and Real Estate (post a depressed base due to demonetisation) were the sectors with top performing stock returns, while IT and Health Care lagged. Mid-caps on average managed to deliver a higher quarterly return compared to large caps and even small caps (though these beat large cap averages as well). 342 stocks out of the CNX 500 delivered hurdle returns of 12% or higher in FY17. Almost four in ten stocks or 180 stocks in the CNX500 delivered a 45% plus return in FY17 (vs. one in ten stocks or 50 stocks in the CNX 500 for CY16) thus highlighting the strong bullish sentiment towards the closing of the Financial Year. Only 27 of these 180 stocks were large caps, while 72 were mid-caps and 80 small caps.
CNX 500 Performance Attribution
Relative Strength – Sector Trends
FIIs have taken the mantle from the DIIs in equity markets of late and have literally led the charge in market sentiment. Across the board, we witness significant spikes in buying activity in recent days, with the real estate sector appearing to gain the most ground from an easy base after being battered in the months of Nov-16 and Dec-16.
Relative Strength Gaining Across All Sectors in the Short Term, Though Real Estate (on easy base), Industrials and Consumer Discretionary Lead the Pack
Markets have again started flocking to growth oriented mid-caps. FIIs in the last 3 months have expressed interest in domestic stocks like HDFC Bank and there have been several successful QIPs such as those of Yes Bank and Minda Industries which had international participation.
Relative Strength Has Been Strongest for Mid Caps, Followed by Small Caps
Key Domestic Events
Kotak bank recently held a press meeting wherein the bank intends to double its existing customer base of 8m to 16m in a span of 18 months as part of its “811” program (commemorating the date of demonetisation, 8-Nov-17). Further, the bank has received board approval to raise up to INR 5,300 Cr. of funds which could be used for consolidation opportunities in the Indian banking sector or any value-unlocking opportunities either organically or inorganically.
Within the Autos space, the Supreme Court banned the sale and registration of older BS III vehicles from 1-Apr-17. Hero Moto has ~2 lakh BS III inventories and a pre-demonetisation run rate of ~7 lakh units/month and with reported discounts in the range of 15-25% on old inventory amounts to an impact of nearly 1% on top-line which could amplify down the bottom line to the tune of 3-4% (given potential additional costs involved in retrofitting some of the units to BS IV standards, re-shipping costs to dealers etc.), the amount by which the stock has fallen post the event.
Domestic equities remain in a comfortable zone for now, with the backing of strong FII inflows and consistent SIP flows. Underlying earnings appear healthy for the FY end as well. 10-year G-Sec yields are coming off the highs seen during the last MPC meet and markets will remain tuned to Mr. Patel and his committee’s take on the economy on 6-Apr-17.
The Nikkei India Manufacturing PMI reported a solid 52.5 for Mar-17 vs. 50.7 in Feb-17 and highlights the underlying continued improving trend in manufacturing activity seen since the start of the CY17. Further, volumes for the auto industry reported strong year-over-year growth in Mar-17 indicating that the effects of demonetisation have finally been weathered.
More importantly, given the turmoil in November last year, examining sequential growth is equally worthwhile and we note that nearly all major auto companies (except Bajaj Auto) have reported month on month growth in Mar-17 (vs. Feb-17). Hero Moto and TVS lead the 2W pack in MoM growth with 16% and 22% sequential growth, while MSIL reported 6% in domestic PV volumes.
Along with the market’s focus on the RBI, NPAs have continued to remain a focus point for many investors. Once regulations, reviews and corrective actions such as timely disclosure, provision and apt recovery for bad assets are in place, things could likely witness an upswing. For instance, RBI’s Mr. Acharya has proposed creation of a “bad bank” – a central institution to restructure stressed loans – and the S4A restructuring of troubled debt by conversion to equity are steps in the right direction. Phased resolutions on these issues would be additional positives.
While indices are richly valued, opportunities exist on bottom up stock selection for alpha creation at the stock and sectoral level.
Technical StrategyThe Nifty started the new financial on positive footing with a new record high of 9245 to close at 9238 level. Index had given breakout with a gap above the resistance trend line and consolidating above it for the last three weeks. Now index has moved above this small congestion zone and continues its higher top, higher bottom formation reiterating that the uptrend is intact. In Nifty call options, highest open interest has moved from strike price 9200 which was acting as resistance to 9500, suggesting as the next level for the market on sustaining above 9230 levels. On the downside too, highest open interest for put option has shifted from strike price 8800 to 9000, indicating the base for the market has shifted higher. Thus, 9000 level becomes critical support level. The Nifty options Put/Call ratio is at 1.03 which is around the neutral level of one. INDIA VIX which is a measure of volatility is at all-time low which has negative correlation to Nifty is supporting the market. This trend can continue till a divergence emerges in the correlation i.e. VIX stops hitting new low new and Nifty continues higher or vice versa.