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Bulls & Bears: India valuations handbook: Telecom by MOFSL

Market makes a smart comeback; closes above 24k in Jun’24.

Nifty rebounds and closes above 24k in Jun’24: The Nifty, after consolidating in May’24, touched a fresh high of 24,174 before ending +6.6% MoM at 24,011 in Jun’24. Notably, the index was extremely volatile and swung around 2,893 points before closing 1,480 points higher. Midcaps and smallcaps outperformed largecaps by 1.2% and 3.1%, respectively, in Jun’24. Similarly, in CY24YTD, midcaps and smallcaps have outperformed largecaps and have risen 20.7% and 21%, respectively, vs. a 10.5% rise for the Nifty.

FIIs report inflows after two consecutive months of outflows: FIIs turned buyers of USD3.1b in Jun’24, after remaining net sellers for two months. DIIs recorded inflows of USD3.4b in Jun’24 after clocking USD6.7b of inflows in May’24. FII inflows into Indian equities stand at USD0.3b in CY24YTD vs. inflows of USD21.4b in CY23. DII inflows into equities in CY24YTD continue to be strong at USD28.5b vs. USD22.3b in CY23.

Breadth favorable in Jun’24: Among sectors, Technology (+12%), Telecom (+11%), Real Estate (+8%), Private Banks (+8%), and Automobiles (+8%) were the top gainers, whereas PSU Banks (-0.3%) was the only laggard MoM. Shriram Finance (+24%), Ultratech (+18%), Wipro (+17%), TechM (+16%), and Grasim (+15%) were the top performers, while Adani Ent. (-7%), Coal India (-4%), L&T (-3%), BPCL (-3%), and Maruti (-3%) were the key laggards.

Major economies end higher in Jun’24: Among the key global markets, Taiwan (+9%), India (+7%), Korea (+6%), MSCI EM (+4%), the US (+3%), Japan (+3%), Brazil (+1%), and Indonesia (+1%) ended higher in local currency terms. However, Russia MICEX (-5%), China (-4%), and the UK (-1%) ended lower MoM in Jun’24. Over the last 12 months, the MSCI India Index (+35%) has significantly outperformed the MSCI EM Index (+10%). Over the last 10 years, the MSCI India Index has notably outperformed the MSCI EM index by a robust 199%.

Earnings – Corporate profit to GDP rebounds to a 15-year high in FY24!: In 2024, the corporate profit to GDP ratio for the Nifty-500 Universe and listed India Inc. swelled to 4.8% and 5.2%, respectively, scaling a 15-year high. The YoY improvement was led by the BFSI, Oil & Gas, and Automobile sectors, which contributed 95% of the total improvement. Conversely, Metals, Technology, and Chemicals contributed adversely. The 0.8% YoY improvement in the 2024 profit to GDP ratio for Nifty-500 was propelled by the BFSI (0.3% increase), Oil & Gas (0.3% rise), and Automobile (0.2% increase) sectors (Detailed report).

Economy – Budget 2025 Preview: Spending growth likely to be increased in FY25: From the Budget 2025 perspective, we believe that the new government will largely retain its tax and non-debt capital receipt (including disinvestment) projections as presented during the Interim Budget in Feb’24. If so, a transfer of INR2.11t by the RBI implies excess receipts of about INR1.5t in FY25. A large part of these additional receipts, we believe, would be spent under various heads, while a small portion could be used to reduce the fiscal deficit.

Our view: Fundamentally, India is witnessing its own mini-Goldilocks moment with excellent macros (GDP growth of 8.2% in FY24 on the back of ~7% growth in FY23, inflation at ~5%, both current account and fiscal deficits well within tolerance band, stable currency, etc.), robust corporate earnings (Nifty ended FY24 with 25% earnings growth and FY25/26 earnings are likely to post 14-15% CAGR), focus on manufacturing, capex and infrastructure creation, and valuations. That said, sectors with overheated valuations and recent sharp outperformance, viz. Industrials, Railways, Defense, and PSUs may see more moderation in valuations before they become attractive again from a risk-reward perspective.

Top ideas: Largecaps – ICICI Bank, ITC, HCL Tech, Coal India, SBI, L&T, M&M, Zomato, Ultratech, CIFC and Hindalco; Midcaps and Smallcaps – Indian Hotels, Ashok Leyland, Godrej Properties, Global Health, KEI Industries, PNB Housing, Cello World, Senco Gold and Kirloskar Oil.

CT Bureau

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