Indian equities have delivered a very strong performance, with S&P NIFTY rising ~20% YTD backed by strong flows (FII ~$9bn and DMF ~13bn till July YTD).
NIFTY companies have reported an inline but weak aggregate earnings for the 1Qtr of FY18. The EBIDTA & PAT declined by ~3.6% YoY and ~11.6% YoY respectively.
Citi analysts cover 48 out of NIFTY 50 companies and within these, 12 companies reported earnings that beat Citi analyst estimates while 16 companies missed Citi analyst estimates.
Due to the weak first quarter, along with expectations of some lagged impact of GST during the 2nd quarter as well, the FY18 earnings estimates have seen significant downgrades from Citi analysts. Their FY18 NIFTY earnings estimates are now down to +12% YoY from ~+18% YoY before the start of the earning season and further cuts are not ruled out.
Headline performance (48/50 NIFTY cos under Citi coverage) vs estimates
Source: Citi Research, Bloomberg
The past couple of weeks have been very eventful, both at the global and local front – escalation of tension between North Korea & US, SEBI order on shell companies, resignation of INFOSYS CEO etc and have resulted in significant volatility. Upcoming Fed tightening and the October deadline to increase the US debt limit could also be potential triggers for further global market volatility. With regard to US - North Korea tensions, Citi analysts expect the US to first seek to exhaust all diplomatic opportunities for a peaceful resolution. After examining 5 quantitative metrics relating to market breadth, they conclude that although a sustained global market correction is not imminent, however the risks are rising and investors should not be complacent.
Given the strong YTD performance of Indian equities, largely driven by supportive foreign and domestic flows, PE valuations still trading 1sd above mean and significant earnings downgrades during the current quarter, Citi analysts remain cautious and see limited upside in the near term. Investors may look at pruning concentrated equity positions and maintain adequate portfolio diversification based on their risk tolerance.