20181001-Maybank_KERPL-India_Strategy__Macro_headwinds,_politics_to_cap_upside_42页_1mb

India Strategy Summary

Core Content and Key Insights

The Indian equity market, represented by the NIFTY, is currently overvalued and faces significant macroeconomic headwinds that could limit its upside potential. Despite a 6.8% retreat from its peak in August 2018, the index remains at a 7% premium to the base-case target of 10,500 and 20% above its long-term average PER of 16.4x. The market's rally is driven by domestic inflows, but concerns about interest rates, INR depreciation, and political uncertainty may lead to a correction.

Main Points

• Macro Headwinds:

  • High crude oil prices, INR depreciation, and rising bond yields threaten the fragile earnings recovery.
  • The market has not fully priced in these risks, especially with upcoming state and central elections in late 2018 and early 2019.

• Investment Strategy:

  • A bottom-up approach is preferred over top-down.
  • Sectors to focus on include exporters, private financiers, autos, data/digital, government-reform-driven businesses, and media.
  • Sectors to avoid: state-owned banks and telecom.

• Top Picks:

  • Large caps: HDFCB, HCLT, MM, UTCEM, PWGR, BJAUT, EDEL, MAHGL, JM, PVRL, CCD.
  • Mid caps: EDEL, MAHGL, JM, CCD, PVRL.

• Valuation Concerns:

  • The NIFTY is trading at 19.4x FY19E and 16.2x FY20E PER, significantly above historical averages.
  • A 18% premium over the long-term average PER of 16.4x indicates overvaluation.
  • The market may correct if earnings and economic growth fail to meet expectations.

• Earnings Recovery:

  • Early signs of earnings recovery in 1QFY19 (14% YoY growth) are promising.
  • However, the recovery is not yet sustainable, and the industrial and infrastructure sectors need time to adjust.

• Political Impact:

  • Political uncertainty, especially around the 2019 general elections, may negatively impact market sentiment.
  • The NDA (Modi government) is still the favorite, but its popularity has declined due to economic and social pressures.

• Currency and Interest Rates:

  • INR depreciation of 13-14% YTD and a 4-year high in crude prices are key headwinds.
  • The RBI is likely to raise interest rates, which could further pressure the INR and reduce FPI inflows.

Preferred Themes

• Digital/Data:

  • A multi-year global growth theme, accelerating in India due to reduced data tariffs.
  • Expected to benefit from 5G adoption, increased broadband penetration, and video streaming demand.

• Exporters:

  • Benefiting from INR depreciation and rising global demand.
  • Notable names: BJAUT, SOTL, and tech companies.

• Private Financiers:

  • Strong retail loan growth and competitive advantage over state-owned banks.
  • Favorable credit underwriting, technology use, and productivity make them attractive.

• Auto Sector:

  • Benefiting from rural demand recovery following a near-normal monsoon.
  • Auto sales increased by 14.5% YoY in 5MFY19.

• Government-Reform-Driven Businesses:

  • Programs like housing, power for all, renewables, and tax rationalization create investment opportunities.

• Media & Entertainment:

  • Print media and cinema exhibition companies are undervalued and may recover in 2H FY19.
  • Strong fundamentals and potential for ad recovery due to election-related government spending.

Market Outlook

• The NIFTY is expected to trade at 10,500 over the next 6-12 months, reflecting a -7% decline from current levels.
• The rally is largely driven by domestic inflows, but FPI outflows may continue due to macroeconomic risks.
• A correction is overdue, and the market may remain range-bound with a negative bias if political outcomes are unfavorable.

Key Monitoring Factors

• Interest Rates: RBI may raise rates, impacting liquidity and INR.
• Domestic Liquidity: Inflows from DII and outflows from FPI.
• INR/USD Movement: Continued depreciation may affect export competitiveness and inflation.
• Earnings Growth: Consensus EPS growth of 22% for FY19E and 20% for FY20E.
• Political Outcomes: State and general elections in 2018 and 2019.

Analysts

• Jigar Shah: +91-226623 2632 | jigar@maybank-ke.co.in
• Neerav Dalal: +91-2266232606 | neerav@maybank-ke.co.in
• Vishal Periwal: +91-226623 2605 | vishalperiwal@maybank-ke.co.in