According to the Bulls & Bears report by Motilal Oswal Financial Services (MOFSL), midcaps have outperformed largecaps over the last 12 months. In the last 12 months, midcaps have risen 50% (v/s a 31% rise for the Nifty), while in the last five years, they have underperformed by 7%. The Nifty Midcap100 P/E now trades at a 14% premium to the Nifty. The Nifty closed higher for the fifth straight month in Sep'21. DIIs recorded the highest inflows since Mar’20 at USD 3.6 billion, while FIIs saw outflows for the second consecutive month at USD 0.8 billion.
Real GDP/GVA grew 8.4%/8.5% YoY in 2QFY22 (v/s our forecast of 8.2%/7.8% and Bloomberg consensus of 8.3%/7.6%). While fiscal consumption grew 8.7% YoY in 2Q as against a decline of 4.8% YoY in 1Q, private consumption spending grew 8.6% YoY in 2Q (lower-than-expected) v/s 19.3% YoY in 1QFY22. Total consumption expenditure contributed 5.6% to real GDP growth. Nominal GDP grew 17.5% YoY in 2QFY22 as against a contraction of 4.4% YoY in 2QFY21.
Valuation deep-dive for the month: Automobiles
The valuation premium of the Auto sector over the Nifty has narrowed to ~5% due to a weak operating environment. After a moderation in valuations, due to the downcycle since 2HFY19 and recovery delayed by two COVID-19 waves, valuations for the Auto sector is near its LPA on a P/E basis.
After the second COVID wave, there are initial signs of a volume recovery in PV, CVs, and Tractors, whereas the recovery in 2Ws is delayed due to the high total cost of ownership. With a volume recovery underway, we have witnessed a margin improvement since 2QFY22, led by lower discounts/VME, operating leverage, and cost cutting. As a result, valuations have stabilized near its 10- year LPA on a P/E basis. On a P/B basis, the Auto sector has seen a re-rating from the lows of Apr’21 and is now trading at a 10% premium over its 10-year average of 3.1x as RoE is now expected to improve to ~17.8% in FY23E (from the lows of 11.8% in FY21).
In our Base Case, Motilal Oswal expects a slower recovery for 2Ws, sustained recovery for PVs and CVs, but a volume decline in Tractors from the peak of the cycle (in FY22E) during the next fiscal. We expect 13%/22%/27%/-5% FY23E volume growth for 2Ws/PVs/CVs/Tractors during FY23E. Based on our volume estimates, we would be nearing/crossing peak volumes of FY19 in FY23E for 2Ws/LCVs/3Ws and FY22E for PVs. The same for M&HCVs would still be materially lower in FY23E than its FY19 peak.
From a volume and margin recovery standpoint, we are in the initial phase of a recovery, with FY23 being the first full year of a volume recovery and margin improvement.
Global equities: Major economies end lower in Nov’21
In Nov’ 21, barring Taiwan (+3% MoM) and China (+0.5%), key global markets such as Russia (-6%), Korea (-4%), MSCI EM (-4%), India (-4%), Japan (-4%), the UK (-2%), Brazil (-2%), Indonesia (-1%), and the US (-1%) end lower in local currency terms. Indian equities are trading at 23.3x FY22E earnings. All key markets continue to trade at a discount to India.
Indian equities: Breadth negative in Nov’21; 40 Nifty constituents end lower
Best and worst Nifty performers in Nov’21: Power Grid (+12%), Cipla (+7%), Bharti Airtel (+6%), Tech Mahindra (+4%), and TCS (+4%) were the top performers. IndusInd Bank (-22%), Tata Steel (-19%), Bajaj Auto (-13%), Axis Bank (-11%), and BPCL (-11%) led the laggards pack.
Best and worst Nifty performers in CY21 YTD: Tata Motors (+150%), Bajaj Finserv (+94%), Grasim Industries (+79%), Hindalco (+71%), and SBI (+68%) were the top performers. Hero MotoCorp (-21%), Dr. Reddy's Lab. (-10%), Maruti Suzuki (-7%), Eicher Motors (-6%), and Bajaj Auto (-6%) were the key laggards.
Indian equities: Market capitalization-to-GDP ratio at a record high since CY07
India’s market capitalization-to-GDP ratio has been volatile, reaching 56% (FY20 GDP) in Mar’20 from 80% in FY19. It has rebounded to 112% at present (FY22E GDP), above its long-term average of 79%. It is at the highest level since CY07. The Nifty is trading at a 12-month forward RoE of 15.4%, above its long-term average.
Around 50% of Nifty constituents trade at a premium to its historical averages
Companies trading at a significant premium to their historical averages: HCL Technologies (+85%), Wipro (+71%), Titan (+70%), Asian Paints (+66%), and Infosys (+60%).
Companies trading at a significant discount to their historical averages: Tata Steel (-64%), ONGC (-58%), Coal India (-53%), JSW Steel (-43%), and ITC (-37%).
Sector valuations: Two-thirds of sectors are trading at a premium to their historical average
The Technology sector is trading at a P/E of 28.4x, at a 59% premium to its historical average of 17.9x. Demand momentum continued in 2QFY22, with sustained outperformance by Tier II IT. The overall outlook on demand remains strong. Deal wins continue to remain stable, with a higher share of small and medium sized Digital engagements. The industry is witnessing supply-side challenges from higher attrition and wage inflation. Margin in 2QFY22 has been stable, led by operating leverage, off shoring, and utilization.
The Cement sector trades at a one-year forward EV/EBITDA of 17.4x against its historical average of 15.2x (a 14% premium). Our channel checks indicate that demand has not yet picked up after the festive season as sales volumes seems to have declined by 20% MoM in Nov’21. We expect the same to pick up from Dec’21 with the onset of the busy Construction season (December-to-April).
NBFCs trade at P/B of 3.3x, above its historical average of 2.7x (a 22% premium). HFCs (including Affordable) have seen strong demand in Sep’21/Oct’21/ Nov’21. Collection efficiencies continue to improve MoM, resulting in minor improvement in GNPA. Gold loan demand has been healthy YoY.
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