WWRR Vol.2.017

Strategy
Market
INDIA
DECEMBER 31, 2018
UPDATE
BSE-30: 36,068
Bye-bye 2018, welcome 2019. 2018 was an eventful but disappointing year for global
equity markets. The Indian market was among the better performers with +3% return
in INR terms and -6% in USD terms. We expect 2019 to be a better year for Indian
equities although the list of events that can potentially derail things in 2019 is quite
long. We expect 10-15% return in 2019 on (1) strong earnings revival, (2) moderate derating
and (3) assuming no major global macro and domestic political shocks.
QUICK NUMBERS
2018: Bad starting point; losing battle from Day 1
The paltry 3% return for the Indian market (Nifty-50 Index) in INR terms and -6% return in USD
terms simply reflects a bad starting point for the market in 2018—(1) overvalued market and
(2) overvalued currency. The Indian market de-rated significantly through 2018 (see Exhibit 1) to
16.7X 12-month forward ‘EPS’ from 20.1X at the beginning of 2018 and the INR corrected
sharply (see Exhibit 2) against the USD along with most DM and EM currencies. Nonetheless,
the Indian market was among the best performers in 2018 (see Exhibit 3) although the
performance was quite varied across sectors and stocks (see Exhibits 4-5).
2019: Better starting point in terms of valuation, currency
Current macro-economic conditions and valuations are quite supportive and drive our
expectations of decent (10-15%) equity returns in 2019. The market is reasonably valued (see
Exhibit 6) although the reasonable valuations reflect strong earnings revival over FY2019-21.
1HFY19 net profits of the Nifty-50 Index grew 12%, which imparts some confidence about
FY2019 profits; we expect 14% growth. Also, the INR seems to be fairly valued (see Exhibit 7);
we see mild depreciation in 2019 compared to the sharp correction that it saw in 2018.
1HCY19: Plentiful events to shake the faith
Global and Indian equity markets will have to contend with several events in 1HCY19. (1) The
US Fed’s rate actions linked to the strength of the US economy will be a key variable; the US
economy continues to display strong momentum (see Exhibit 8) and stronger-than-expected
economic data could surprise the market negatively in terms of the extent of rate increases by
the Fed (see Exhibit 9). (2) The progress on China-US trade issues will be another variable with
the US holding the threat of further increases in tariffs on Chinese imports from March 1, 2019.
(3) The level of oil prices linked to further US action against Iran’s oil exports (current exemption
to eight oil importing countries from Iran ends on May 4, 2019) will matter particularly for
India’s macro. (4) India will hold national elections in April-May 2019 and the outcome is quite
uncertain post the strong performance of the main opposition party in recent state elections;
these states contributed handsomely to BJP’s victory in 2014 (see Exhibit 10).
Nifty-50 Index
delivered 3% in INR
terms, -6% in USD
terms in 2018
Nifty-50 Index
trading at 15.9X
FY2020E and 13.8X
FY2021E net profits
Nifty-50 Index net
profits to grow 14%
in FY2019, 27% in
FY2020 and 15% in
FY2021
Sanjeev Prasad
Sunita Baldawa
2HCY19: Earnings will matter once India is past the election hump
Anindya Bhowmik
We expect earnings growth to be the biggest driver of the Indian market in 2019/FY2020. Our
14% and 27% growth in the net profits of the Nifty-50 Index for FY2019 and FY2020 may look
high but this largely reflects earnings revival in ‘corporate’ banks from a low base (see Exhibit
11). On an ex-banks basis, we expect FY2019 and FY2020net profits of the Nifty-50 Index to
grow 9% and 14%. We would refer readers to our December 20, 2018 report for more details.
For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.