Nifty band may stretch past 9700
Caution advised for investors while cherry-picking stocks on any corrections; monetary policy to set tone
Globally, equities have raced to new all-time highs. It is the fifth consecutive month of positive returns for headline indices, Nifty delivering around 3.4% in May. Strong domestic liquidity, good earnings season, progress on goods and services tax (GST), and prediction of normal monsoon ensured the momentum remained intact, though, midcaps have underperformed the Nifty for the first time in five months, reflecting the expensive valuations in certain pockets. Liquidity remains benign, with foreign institutional investor (FII) flows of $1.5 billion and domestic mutual fund (MFs) flows also at $ 1.5 billion in May.
Robust fourth quarter (Q4) FY17 earnings propelled the upward momentum. For the Nifty, sales grew 13.5%, Ebitda grew 4.6%, and PAT grew 15.2%. While the earnings season was better than expectations on aggregate, the internals do not suggest strong underlying operating recovery, as yet.
Going forward, we note GST could result in material changes to our current optimistic 17% Nifty earnings growth forecast for FY18. We remain concerned on valuations which appear a bit stretched; Indian equities are trading at a P/E of around 19.7x FY18E earnings, at a 10% premium to the long-period average of 17.3x. Indian equities have gained larger share in global equities pie. It’s share in the world market cap now stands at 2.6%, above at its long-term average of 2.4%. Over last 12 months, world market cap has increased 17.6%. India’s market cap has increased 33%.
A record decline in the construction sector and deceleration in manufacturing activities dragged real GVA growth. FY17 was supported by government consumption, without which real GDP growth would have fallen to 5.6%, much lower than average growth of 7.2% for the previous four years.
This week, RBI’s monetary policy and monsoon progress will keep traders on toes. We expect volatility to return on account of some profit-taking and no room for sentimentally negative news flows. Broadly, economic macros remain a concern however, going ahead, corporate earnings update for Q4FY17 green-shoots are visible, suggestive of inclusive economic upturn aided by normal monsoons.
The Nifty band has expanded which suggests a range of 9200 – 9750. Risk-reward ratio is in favour of being cautious while grabbing cherries on corrections.
...& ANALYSIS
- RBI’s monetary policy and monsoon progress will keep traders on toes. Volatility to return on profit booking
- Corporate earnings update for Q4FY17 suggest inclusive economic upturn aided by normal monsoon
The writer is head-retail research, Motilal Oswal, Securities