According to the India Strategy Report by Motilal Oswal Financial Services (MOFSL), The Nifty has corrected 8% since hitting a new high on October 18th, owing to global factors such as the Fed's taper announcement, rising bond yields, higher crude oil prices, and the strengthening of the US Dollar Index. Primary market activity in India remains quite elevated, with a bunch of new age companies (Zomato, Nykaa, Policy Bazaar, Paytm, etc.) raising capital. Around Rs. 964 billion has been raised in FY22 YTD, which is higher than Rs.909 billion raised in FY18. While the primary market has seen net FII investments of USD 7.2 billion in CY21 YTD, the secondary market saw net outflows of USD 1.77 billion. The discovery of a novel COVID-19 variant - Omicron - in South Africa wreaked havoc on global equity markets on 26th Nov’21. This resulted in risk-off sentiment, with markets correcting by 2-3% globally, easing bond yields, and an 11% fall in Brent Crude prices. India’s VIX rallied 25% to 20.8.
Corporate earnings delivery continues to remain robust (link) as 2QFY22 earnings were above MOFSL estimates, led by strong growth in Metals, Oil and Gas, and PSU Banks. Earnings projections for the Nifty remains stable so far at Rs.730/Rs.873 for FY22E/FY23E, a growth of 35%/19%, after delivering 15% growth in FY21.
Index corrects 8%, but constituents see more damage
Among NSE500 constituents, 44% have declined by over 10%, while ~10% (47 companies) fell by more than 20%. Over the same period, the Nifty has declined by 8%. Around 19% of companies have gained in the same period. Metals (-15%), Private Banks (-11%), FMCG (-10%), Realty (-9%), and Auto (-9%) have seen a major correction among indices, while IT (-4.7%) and Pharma (- 5.5%) have remained relative outperformers. While the Nifty is 8% shy of its fresh high, 70 constituents in the NSE500 are down more than 20% from their recent highs.
Elevated volatility to continue; defensives may see greater acceptance
COVID-19 cases continue to remain under control, despite the festive season. The total active cases are currently at 0.11m v/s a peak of 4m in May’21. The decline in active cases has led to an increase in economic activity and mobility. While the new variant - Omicron - adds to the uncertainty, MOFSL expect more clarity to emerge in the next few weeks as additional data comes out. So far, this variant has not been detected in India. This will mar sentiment in Travel, Tourism, Hospitality, and Retail, which has seen significant outperformance in the last few months on the back of opening up of economy, a good festive season, and a broad-based demand recovery.
MOFSL expect sector rotation in the market to continue and defensives like Pharma, IT, and Consumer to make a comeback till sentiments improve.
After the pullback, equity valuations are at 23.3x/19.5x FY22E/FY23E. The EPS of the Nifty are now more reasonable. Unlike the first COVID wave in early CY20, India managed the second wave in April-May 21 with local restrictions and no nationwide lockdowns. MOFSL anticipate a similar approach if the necessity arises in the future.
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