In expectation of further motivation to invest in equity, market is edging higher…

On 29^th October 2019, about 25 companies of Nifty50 indices declared Q2 results. The outcome is encouraging with a PAT growth of 20% on a YoY basis compared to expectation of ~11.3% for the same stocks. For broad indices like Nifty500, 127 stocks have declared results, a similar traction is visible with 18.4% growth in consolidated PAT which is 6% on a QoQ basis. This is led by cut in corporate tax, better performance from sectors like Banking, Cement and FMCG. However, weak performance is seen from Auto and IT sector. But we are seeing positive signs in auto sector with retail car sales having gained some traction in the ongoing festive season after six continuous months of declining sales. As per media reports, sales have risen by 5% to 7% during Navratri, Dussehra and Dhanteras from the last year’s numbers for the same festive period, this will be visible in next quarter result. Two-wheeler sales haven’t improved on a YoY basis but on a month on month basis it has.

The most noticeable are the better numbers from the Banking sector, providing a hope that India’s finance segment NPA problem is normalising. Q2 result for banking sector has been better due to lower base of last year, reduction in provision and positive vibes over NPA resolution. The outlook for their future is also improving led by improvement in asset quality, increase in liquidity and cut in operational cost. The negative is that slippage is still happening in specific stocks due to exposure to some stressed NBFCs and pending resolutions. But valuation of the banking sector based on long-term trend is attractive and earnings trajectory is improving, which is giving a good chance for banking sector to do well and outperform the market in the future.

Market has assessed the ongoing Q2 result as marginally better than expected, till date. And hopes the best for the economy in the future by better earnings growth due to cut in taxation, post festival season uptick, good monsoon and reduction in interest rate. Sentiments in equity market is also improving due to weak crude oil prices, positive global news regarding US-China trade deal and Brexit as well as on expectation of further reforms from the government in direct and indirect tax including investment in equity asset.

Equity as an asset class needs motivation like growth and incentives to attract investors. The platform for equity market is improving led by better liquidity, lower taxation, likely further cut in taxation, reduction in interest rate and government’s support to the economy with more stimulus. We may be in the early stage of this growth phase and volatility may prevail in the short-term, but Indian equity market will have a positive momentum in the medium to long-term. Amongst them mid and small cap are looking attractive based on accommodative valuation providing a favourable risk-reward for investors.

Posted: October 2019.