>> Markets up 3.5% in Oct’20
: After consolidating in Sep’20 (down 1.2% MoM), the Nifty headed north in Oct’20 (up 3.5% MoM) and touched the 12k mark to later close at 11,642. After trudging to a low of 7,610 on 23rd Mar’20, the Nifty bounced back more than 53% from its lows. Strong momentum in Oct’20 was despite the global concerns related to the pandemic – many countries in Europe imposed restrictions to curb the spread of the virus. FII inflows were back in Oct’20 and stood at USD2.5b. DIIs remained net sellers with outflows of USD2.4b – highest monthly outflows since Mar’16. The Nifty Mid-cap 100 index underperformed the Nifty by 3% in Oct’20. The Nifty Mid-cap 100 P/E ratio now trades at 4% premium to large-caps at 20.5x (v/s 11.9x in Mar’20.
>> Demand recovery and cost optimization key themes
: Increase in economic activity, continued demand improvement coupled with cost rationalization were the key highlights of 2QFY21 earnings season, which has seen decent beat and consequent upward earnings revision. Economic recovery continues, with high-frequency data for Oct’20 coming in quite strong (GST collections, Manufacturing PMI index, rail freight and power demand). Our in-house Economic Activity Index (EAI) for India’s GVA (called EAI-GVA) posted growth of 2.2% YoY for the first time in seven months in Sep’20, following decline of 2.2% YoY in Aug’20.
: More importantly, Covid-19 cases have seen meaningful decline to 510k active cases currently from the peak of 1.02m active cases in mid-Sep’20. However, valuations at 17.4x FY22E earnings for Nifty, while not very expensive, do not offer as much margin for safety as a few months ago.
: We stay Overweight on IT, BFSI, Healthcare, Telecom and Auto, and maintain Neutral on Consumer in our model portfolio. Another round of fiscal stimulus could help elevate sentiment further, in our view.
>> Top Ideas: Large-caps: ICICI Bank, SBI, Infosys, Divis Labs, Titan, Hero, HUL, Bharti Airtel, Muthoot Finance, UltraTech.
Mid-caps: AU Finance, IEX, IPCA, Motherson Sumi, ICICI Securities, Crompton Consumer, ABFRL, Mphasis, Emami, LIC HF.