Monthly Strategy - June 2017 - CSEC Research

Markets continue to make new life-time highs

- In the month of May, India's key benchmark indices rallied (Nifty 3.4%, Sensex 4.1%) on back of continuous flow of funds from Institutions, easing inflation rates, finalization of GST rates, expectation of better monsoon etc.

- During the month, sectors such as FMCG, IT, Auto & Bank rose by 7.4%, 6.3%, 6.1% & 4.8% respectively while Healthcare and Power lagged by 9.7% & 4.7% respectively. Drag in Healthcare sector was largely on account of reporting below estimated corporate earnings impacted by pricing pressure and drop in US Market sales.

- On the positive side, better corporate earnings reported by FMCG companies & the finalization of GST rates specifically on consumer goods which effectively brings down the overall tax burden of FMCG companies also helped boost the investor sentiments.

- However, the release of GDP data was quite disappointing with the Indian economy growth slowing down sharply to 6.1% in Jan-March quarter down from 7% in previous quarter reflecting the impact of spillover of note ban from last quarter. GVA growth which excludes indirect taxes slowed even more sharply to 5.6% compared to 6.7% in previous quarter. The Central Statistics Office (CSO) released its provisional estimates for 2016-17, placing India's real GVA growth at 6.6% for the year, down from 6.70% (second advance estimates released on February 6).

- Going ahead, the key things to drive the market sentiments will be rollout out of GST from July 1, 2017, Progress of South-west monsoon, Outcome of US Fed meet, France parliamentary elections etc.

Valuations and Outlook

- Market has continued to rally driven by inflow of funds from both Domestic and Foreign Institutions. However, we remain cautious going ahead on couple of reasons.

- First being the health of banking sector with reported earnings of PSU banks hinting that the worst is not yet over as NPAs continued to rise in most of the banks.

- Secondly, GST is all set to roll-out from July 1, 2017, as there is less surety on the readiness of the companies for transition; it may cause short term disruption and might lead to overall slowdown in the economic growth in the coming quarter. However, the implementation of GST remains beneficial in the long-term view.

- The consensus Nifty EPS forecast for CY17 and CY18 stands marginally altered at 523.9 and 638.1 respectively. NSE Nifty is trading at a reasonably high valuation of 18.5x (+1 STD Dev is 18.6x) CY2017E earnings (vs. historical average of 16.1x).

- We remain selectively positive on Auto and Auto Ancillary, Private bank & Housing Finance Companies and neutral on Consumption staples.

Source : Equity Bulls

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