Jul 11, 2017
Nifty 50
What worked this quarter? In the Nifty 50, it was business as usual, with Financials occupying 4 of the top 10 spots in quarterly performance. Rounding out the top performers were Maruti, Hindustan Unilever, ITC and Hero Moto Corp. What’s noteworthy was that Consumer Staples – ITC and Hindustan Unilever – delivered strong performance. What didn’t? The usual suspects again. Health Care and Information Technology brought up the bottom of the pack. Nifty 50 losers were led by Lupin and Tech Mahindra.
For the year to date period, 28 stocks out of 51 are delivering hurdle rate returns of 12% or higher. Financials have dominated yet again, with stalwarts HDFC Bank, Kotak Mahindra, Yes Bank and IndusInd Bank leading. Tata Steel was the only company in the Materials space to deliver stellar returns. Rounding out the top performers were Maruti, ITC and Hindustan Unilever. It would be safe to surmise that quality large cap delivered this year.
For the year ended June 30, 2017, 27 of the 51 stocks delivered hurdle returns of 12% or higher. Materials and Energy are dominated, suggesting that sectoral rotation veered back to Financials this calendar year. The dispersion in returns was wide. Vedanta delivered a +103.5% return while Lupin was down -28.7%.
CNX 500
During the year ended June 30, 2017, each of the top 50 stocks in the CNX 500 delivered a minimum return of 76.1%. Performance was dominated by mid-caps. Motilal Oswal was the top performer for the one year period ended 30-Jun-17.
259 out of the 500 stocks delivered 20% gains last year, demonstrating that mid and small caps are delivering strong returns. Replicating the Nifty 50, the worst performers during the quarter were companies in the IT and Health Care sectors. Equally notable on the positive side was that a number of Consumer Discretionary names were amongst the winners. Automobile stocks did well, including Minda Industries, Balkrishna Industries and Sundram Fasteners.
From a quarterly perspective, momentum clearly favored Financials, mimicking the Nifty50. Piramal Enterprises was the only large cap to deliver strong returns during the quarter comparable to the top mid-cap performers.
Fundamental Strength Ratings
Our fundamental strength rating is a metric that tracks growth, profitability, margins, and valuations to come up with a score for each company.
Nifty 50
The strongest stocks from a fundamental ratings perspective were Adani Ports, HCL Technologies, Power Grid, Indiabulls Housing, and Yes Bank. Energy stocks by virtue of their strong fundamental performance and valuation, ranked highly as well. On the other hand, the weakest companies in the Nifty were Cipla and the cement stocks ACC and UltraTech.
CNX 500
Along with Materials, Industrials and Energy, select Information technology and Financials picks dominated the strongest fundamental strength ratings in the CNX 500 list. Notable performers with top rankings included NIIT Technologies, Suntech Realty, and Dewan Housing Finance.
Technical Strength
Our technical rating strength is a metric that tracks technical factors such as volume and momentum to come up with a technical score for each company.
Nifty 50
Materials stocks dominated on the technical strength ratings during the year. Rounding out the top ten were Maruti, Adani Ports and BPCL. On the other hand, negative momentum plagued IT and Health Care. Tech Mahindra, Infosys, Wipro and Tata Motors were the lowest ranked, underscoring that the worst performers today are companies in the IT space or companies with exposure to China and the U.S.
CNX 500
Quality mid cap stocks and emerging smaller cap stories showed rising interest amongst investors. It’s clear that investors are moving into lower capitalisation names in the search for excess returns. We’d also note, however, that our analysis indicates there was rationality with volume chasing companies with robust fundamentals.
Markets as a whole witnessed somewhat lower volumes, with the CNX 500 witnessing ~93% of the usual weighted (short, medium and long term) volume momentum. However, Small-Caps in the CNX 500 witnessed unusually high volumes, and bucked the trend.
Earnings Revisions
Nifty 50
Earnings revisions in the last few months for the Nifty 50 have been largely negative, with the earnings estimates of companies in the index falling by -4% on average in the last 3 months, and -6% in the last 6 months.
Tata Steel had the strongest upward revisions across all periods. Other noteworthy companies with upward revisions were Maruti, Adani Ports and Eicher Motors. Not surprisingly, Sun Pharma, Lupin, Bharti Airtel, Tech Mahindra, Dr. Reddy and Axis Bank suffered deep earnings downward revisions.
Within Industries, Construction, Transport and Machinery Industries witnessed positive earnings revisions. The Metals industry within the Materials space and the gas utilities sub-sector also witnessed significant growth in earnings estimates, with both seeing double digit growth in earnings expectations in the Nifty 50.
CNX 500
While earnings revisions in the large cap space were largely negative, the CNX 500 as a whole saw downward revisions in earnings as well, with earnings being revised downwards by -7% on average in the last 3 months, and -9% in the last 6 months.
The Utilities sector witnessed a positive revision in last few months. On the other hand, Telecommunications and Health Care received downward earnings revision of the order of -15%, which was reflected in the fall in the prices of the stocks in these two sectors.
On the other hand, Wireless Telecommunication Services saw a huge fall in earnings estimates in the last couple of months. Within Financials, Capital Markets industry saw positive earnings upgrades.
Large Caps had downward revisions in earnings in the CNX 500. The midcaps as well have seen larger downward earnings revisions in every time period. This reflects the fact that markets are pricing in more safety in large caps.
Outlook
Valuations are heady today but we think a case may be made for high valuations driven by the lower cost of capital, foreign fund flows, lower inflation and lower interest rates. Post the demonetisation blip, markets have remained staunchly resilient. Now, another major reform in the form of GST has been implemented. By linking Aadhaar to mobile, and Aadhaar to PAN, alongside GST and demonetization, the government is demonstrating clear intent to bring the larger populace into the fold. This has dramatic repercussions, which when considered from a market’s perspective, are clearly positives. While this will certainly translate into increased tax rolls for the government, we also see direct benefits for organized players.
Apart from GST, rate transmission benefits, 7th pay commission, a good monsoon and farm loan waivers could serve as additional well recognized triggers. On the negative side, adverse outcomes on the NPA resolution efforts with the largest defaulters or a worsening of NPAs with public sector banks could create concerns amongst investors. Globally, we’re concerned with the actions of the Fed, though we’d point out that Fed tightening cycles have historically been positive for emerging markets.
One other under-appreciated positive is the decline in crude oil and the improving prospects of solar energy. As an energy importer, lower cost of goods sold will help companies deliver operating leverage, while keeping inflation in check.
Earnings in the fourth quarter were impacted by demonetization. The market is evolving into a market of haves and have nots, with a third of the market doing very well and slightly larger than a third struggling with operating performance or debt burdens.
We think earnings will similarly be impacted by GST as many companies chose to put off purchase decisions in the June month around uncertainties and impacts related GST. So we’d be looking for marginal improvement in the upcoming quarter and have higher expectations for the second half of the calendar year.
Technical Outlook
Last week Nifty bounced back 1.52% to close at 9666 levels for the week. The up move of last six trading session has recovered down move of seventeen sessions from June 6, clearly indicating bullish bias in the market. Relative strength index (RSI) indicators has also given positive crossover with its average on weekly chart now. Recent low of 9449 becomes important support level for the market. In Nifty put options, 9500 strike price has highest open interest followed by 9400.
Also, Nifty options Put/Call ratio has moved away from neutral level of one and currently at 1.29 level indicates put additions and base for the market around 9500-9400 levels. Thus suggesting market now has critical support at 9400-9450 levels. On the upside, 9700 needs to be sustained on tradable basis for market to move higher. Next level for index is seen at 9880 and then at 10040 levels. INDIA VIX at all time low levels (currently at 10.87), any major spike in volatility will be cause of concern for the market.
Performance Attribution Q2 CY 2017
A deeper analysis of the two flagship indices, the Nifty 50 and CNX 500 across stocks, sectors, industries and market caps reveals insights and implications in terms of portfolio performance.
Nifty 50 Performance – Quarter, YOY and YTD
CNX 500 Performance – Quarter, YOY and YTD
Fundamental Strength Ratings Nifty 50
We rank the Nifty 50 by growth, profitability, margins and valuation below to come up with a fundamental strength ranking.
Fundamental Strength Rating – Nifty 50
Fundamental Strength Ratings CNX 500
We rank the CNX 500 by the same methodology.
Fundamental Strength Ratings CNX 500 (continued)…
Technical Strength Ratings Nifty 50
Technical Strength Ratings CNX 500 (continued)..
Contribution Analysis – Returns & Contributions
Earnings Revisions Nifty 50
Earnings Revisions CNX 500
Performance By Capitalisation & Sector – CNX 500
EPS Revisions
EPS Revisions Are Headed Downwards For Large & Mid Caps
EPS Revisions Were Weakest for Telecom & Industrials Last Quarter
Volume
Volume Momentum Is Strongest in Small Caps
Volume Momentum Is Strongest In Industrials in the Short Term
