Indian equity outlook - The pessimism seems overdone, bull market should ... demand revival (especially urban demand) is
Indian equity outlook
OUTLOOK 2016 Indian equity outlook - The pessimism seems overdone, bull market should resume in 2016 After a big rally in 2014, Indian markets struggled in 2015. The nifty was down marginally from the beginning of the year and close to 15% from its intra-year highs. It was notable that the rally which started in late-2013 did not see any meaningful correction till Mar-2015. Hence the subsequent correction should be seen as a healthy part of the bull market which is allowing for a reset of expectations to a more reasonable level. In fact all historical bull markets have seen multiple corrections over their cycle. As an example the 2003-07 bull market had at least 2 significant corrections of well over 20% and multiple smaller corrections of over 10%.
1997 2010 1994
2007
1989
2006
1985
2004
2005
1991
1986
2013
1992
2009
2000
1996
1984
1990
2003
1995
1987
1983
2014
1999
2011
1998
1982
1993
1981
2008
2001
2002
2012
1988
-20% and below
-20% to 0%
0% to 20%
20% to 50%
50% and above
S&P BSE Sensex: Yearly Performance
Source: ACEMF
Indian equity markets struggled in 2015 on account of three significant headwinds. Firstly global investors have been pulling out money from emerging markets and India has got caught up in that. Within India there has been a resetting of reform and policy expectations from the government even as the government has faced political challenges in passing reform legislation. Finally and most significantly, the ongoing economic recovery has been weaker than expected so far and consequently demand has not picked up sufficiently. This has led to disappointments in topline growth across sectors leading to earning downgrades.
Nifty 50 Index EPS - Consensus Estimates
(EPS)
700 650 1 YR Ago
Current
600 550 500 450 400 FY15
FY 16
FY17
OUTLOOK 2016 th
Current refers to 30 Nov 2015. Source of data: Bloomberg Consensus Estimates, IIFL Research
Corporate profits have trailed nominal GDP growth over the last few years. The pressure on profitability has come from a number of factors – weak demand, large capex projects in progress (many of which have got stuck or delayed), high interest rates and high input cost inflation. As these issues start getting resolved over time, we should be entering a period where earnings growth can outpace nominal GDP growth over the next few years.
FY16Estimate
FY15
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
FY04
FY03
FY02
Corporate Profit to GDP (%)
FY01
(%)
Corporate profits to GDP
9 8 7 6 5 4 3 2 1 0
Source: Motilal Oswal
2015 saw a sharp improvement in corporate margins. The fall in commodity prices (especially crude oil) has helped bring down input costs. The fall in commodity prices is also supporting the process of disinflation in the economy. This fall in inflation is creating the headroom for lower interest rates which should further bring down finance costs for companies.
Change in EBITDA Margins for domestic companies*
(YoY bps)
400 300 200 100
0 -100
-200 Mar-13
Sep-13
Mar-14
Sep-14
Mar-15
Sep-15
Source: IIFL Research, *Change in Ebitda margin is for IIFL Universe
However even as EBITDA margins have improved, topline growth has disappointed. The most significant lever for absolute earnings growth over the medium term is growth in topline – thanks to the presence of operating leverage. As the economic growth picks up, a meaningful demand revival (especially urban demand) is expected during 2016. Current
OUTLOOK 2016 low capacity utilization levels will allow companies to take advantage of any demand revival through existing capacity, thus providing high marginal profitability of incremental demand. Capacity Utilization (%)
80 78
Capacity Utilization 76 74 72 70 68 66 FY 13 Q1
FY 13 Q4
FY 14 Q3
FY 15 Q2
FY 16 Q1 Source: RBI
Foreign portfolio investor interest in India has remained volatile linked to sentiment on the local economy as well as global developments (especially the US Dollar and interest rate expectations). The second half of 2015 saw FPIs turn sellers in the local equity market. On the other hand, the government has had good success in positioning India as an FDI investment destination. India surpassed US and China in the first half of 2015 as the top FDI destination in the world. The increase in FDI bodes well for the external account stability of the country as this flow tends to be far more stable compared to FPI flows. US$mn 50,000
Trailing 12m FDI and FII inflows
Trailing 12m FDI and FII inflows
40,000
30,000 20,000 10,000
FDI 12 m trailing
Sep-15
Mar-15
Sep-14
Mar-14
Sep-13
Mar-13
Sep-12
Mar-12
Sep-11
Mar-11
Sep-10
Mar-10
Sep-09
-20,000
Mar-09
-10,000
Sep-08
0
FII 12m trailing Source: Barclays Research, NSDL
2014-15 has seen the return of the Indian investor to the equity market after many years. We expect the inflows to continue going forward as well. Equity ownership of Indian households remains abysmally low – both in absolute terms as well as compared to historical levels seen in 2007-08. As these holdings start to get normalized, they can sustain large inflows into equities. Large domestic inflows are structurally important as can provide a counter-balance to FII flows.
OUTLOOK 2016 Scope for domestic household savings to move into equities
14.90%
House-hold wealth split 5.00% 4.10% 3.10% 2.70%
57.80%
12.40% Bank Deposits Provident and pension funds Equities Property
Insurance Funds Cash Gold Source: CLSA,
12,000
Net inflow Domestic-Equity MFs INR crs.
10,000 8,000 6,000 4,000 2,000 0 Sep-14
Dec-14
Mar-15
Jun-15
Sep-15
Source: Net flows by AMFI data from ACEMF. Net Inflow includes Equity Schemes excluding ELSS
Looking ahead into 2016, we think that the equity market sentiment seems to have become excessively cautious. We expect continued steady improvement in the growth environment which should start flowing through into better corporate earnings. Helping earning growth in 2016 is lower inflation and commodity prices, transmission of 125 bps of rate cuts done this year, improvement in urban discretionary demand, follow-on effects of government spending on capex as also one-off factors such as award of the pay commission. Long term investors should stay invested in the market.
OUTLOOK 2016
Statutory Details and Risk Factors Statutory Details: Axis Mutual Fund has been established as a Trust under the Indian Trusts Act, 1882, sponsored by Axis Bank Ltd. (liability restricted to Rs. 1 Lakh). Trustee: Axis Mutual Fund Trustee Ltd. Investment Manager: Axis Asset Management Co. Ltd. (the AMC) Risk Factors: Axis Bank Limited is not liable or responsible for any loss or shortfall resulting from the operation of the scheme. This document represents the views of Axis Asset Management Co. Ltd. and must not be taken as the basis for an investment decision. Neither Axis Mutual Fund, Axis Mutual Fund Trustee Limited nor Axis Asset Management Company Limited, its Directors or associates shall be liable for any damages including lost revenue or lost profits that may arise from the use of the information contained herein. No representation or warranty is made as to the accuracy, completeness or fairness of the information and opinions contained herein. . The material is prepared for general communication and should not be treated as research report. The data used in this material is obtained by Axis AMC from the sources which it considers reliable. While utmost care has been exercised while preparing this document, Axis AMC does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Investors are requested to consult their financial, tax and other advisors before taking any investment decision(s). The AMC reserves the right to make modifications and alterations to this statement as may be required from time to time. Mutual Fund Investments are subject to market risks, read all scheme related documents carefully. Data updated as on 15th Dec 2015
