Eye on India:Bullish but nothing to buy!

Event.

NIFTY target at 8800: The Indian market has gained 3.9% YTD and we areforecasting an additional 7% return until Dec’16 based on 16.5x FY18E.

Economic recovery remains, earnings downgrade cycle seems to be ending,government-led infrastructure build is picking up, monsoon is expected to benormal and reforms like GST are on the anvil, which should re-rate the markets.

Adding weight to Consumer, Industrial and Utility: Our model portfolio hasoutperformed by 460bps since inception in Nov’14 and ~170bps in the lastthree months. We add weight to Tata Motor, Eicher Motor, ITC, L&T,Sadbhav, NTPC and GAIL to play the consumption and Infrastructure themes.

Impact.

Earnings downgrade cycle is ending: Earnings in Q4 came out strongerwith ex financials and ex commodities stocks under our coverage reporting14% PAT growth, 430bps higher than expected. Earnings upgrades wereseen in Metals, Industrials & Autos. A full-blown earnings upgrade cycle maynot be starting as yet but consensus estimates of 14-15% earnings growth forFY17 look reasonable given the momentum and low base.

Valuations are getting stretched but more to go: Based on our estimate ofNIFTY EPS of Rs454 (+15%) and Rs531 (+17%) for FY17E/18E, the marketis trading at 18x and 15.4x PER respectively. The 10-year average PER forNIFTY stands at 14.8x but given the improving macroeconomic scenario, weexpect valuations to stretch to 1std deviation at 16.5x. As compared to otherEMs, Indian markets are trading just around the last 10-year average.

FII inflows pick up: Post averaging ~US$20bn in CY12-14, FII inflowsslowed to a mere US$3.3bn in CY15. YTD, FII inflows stand at US$2.2bn andin the last three months alone US$5bn has found its way to Indian Equities.

FIIs sold Telecom, Cement and Healthcare stocks, while they bought NBFCs,Industrials, Metals and Real Estate.

Macquarie vs Consensus – most bullish Autos and Industrials: Whileoverall for the market we are in line with consensus of 14% earnings growthfor FY17E, we are above consensus for Industrials, Autos, Healthcare andMetals. We are below consensus for Telecom, NBFCs, Media and Cement.

Consumption and Infrastructure the dominant themes: Prediction of goodmonsoon, likely implementation of 7th pay commission and pick up ofexecution of infrastructure projects are the key themes to play. We are OWConsumer Disc. (+232bps), Industrials (+598bps) & Financials (+383bps). Ourbig UWs are IT (-315bps), Cement (-366bps) and Telecom (-164bps).

Outlook.

Buy the dips: Global uncertainties like Brexit, the Fed rate hike and a Chinaslowdown will continue to provide opportunities to go long Indian markets. TheIndian economy has bottomed out and a slow but patchy recovery isunderway. Reform process has also picked up laying the foundation for stablelong-term growth and hopefully GST will see approval in August. Buying intodips is recommended.