India strategy

Market outlook

Vikash Kumar Jain Anatomy of a market bottom #2

vikash.jain@clsa.com At attractive levels now but may not have hit the final bottom on Nifty
+91 22 6650 5015
After a c.40% drawdown from its January peak, Nifty forward multiples have fallen
to nearly 15-year lows other than the 2008 GFC; but 17% YoY growth baked into
Nifty’s FY21 consensus EPS could make investors prefer trailing multiples. While
the Nifty hit the same level as the GFC-low on trailing PB, it is still at a premium
on trailing PE. With two-thirds of Nifty stocks trading -1 standard deviation below
10-year average multiples, bottom–up valuations have become attractive; but
sentiment indicators have yet to signal a final bottom. Mar-20 may have been a
capitulation period but it may be followed by relative apathy before a final bottom.
2 April 2020 Bottoms in the four prior 40%+ declines of the last 30 years took 10-27 months.
Forward multiples are close to points of previous bottoms other than GFC
India q The near-40% Nifty decline from its mid-January peak to last week’s low took its PE to
Market Strategy a low of 11.3x; this is within the 11.1-11.6x PE range that acted as bottom in three of
the previous large declines in the last 15 years: 2005, 2006 and 2011. In 15 years, only
during GFC in 2008 did Nifty’s 12-month forward PE bottom at a lower level: 7.6x.
q At last week’s low, 10-year GSEC yield minus Nifty’s 12-month forward earnings yield
hit a low of -2.4%. This is the highest relative attractiveness of Indian equities versus
bonds in the last 15 years other than the GFC from Oct-08 to Mar-09.
q CLSA’s economics team believes demand destruction caused by Covid-19 will be
greater than GFC in 2008. As in 2008, this may have made investors wary of
Please see the first report in our
Anatomy of Market Bottom series
consensus estimates, which is why the 2008 bottom was sub-8x forward PE.
q FY21 Nifty consensus EPS has been cut only 5.9% in the last three months. However,
this still implies 17%/21% YoY growth in FY21/22 over the 10% expected for FY20.
Near all-time lows on trailing PB but room to go on trailing PE
q Low belief in forecasts makes us look at trailing multiples. Nifty’s 12-month trailing PE
hit a low of 14.7x last week. While this is a seven-year low, it is far above the GFC low
of 9.1x and is also above lows at 2011/2005/2004 bottoms (13.6x/11.9x/11.2x).
q Last week’s low of 1.9x trailing PB for Nifty is near 18-year lows and the same as the
GFC low. Only at Sep-01 low of 1.7x was Nifty’s trailing PB lower in the last 20 years.
q With banks making up 30% weight in Nifty, last week’s low of 1.3x on trailing PB of
NSE bank index is still much higher than its 15-year and GFC lows of 0.94x in Mar-09.
Such levels have yielded great returns; attractive even on bottom-up valuations
q Nifty 12-month forward PE/earnings yield minus 10-year GSec yields/trailing PE/trailing
PB has traded near recent lows in only 8%/3%/25%/5% of days in the last 15-20 years.
q Investing at levels similar to last week’s lows on these multiples has historically yielded
31-46% annual returns in 1-2 years but with lower 18-21% at level on trailing PE.
q Using Bloomberg consensus data for 12-month forward multiples, we find 88% of
Nifty stocks are trading below their respective 10-year average multiples. In fact, 65%
of stocks are 1 standard deviation below their 10-year average multiples.
q Almost 96% of Nifty stocks are trading below five-year average multiples with nearly
80% of these now even 1 standard deviation below five-year average valuations.
q Only a few consumer names are trading above their historical average benchmark
valuation. Bottom-up individual stock valuations have become quite attractive.
Breadth and volatility indicators have yet to signal a convincing bottom
q This may be only the fifth instance of a 40%-plus decline in Nifty in the last 30 years.
The final bottom in the four previous falls took 10-27 months versus less than three
months in the ongoing fall. Some of the sentiment indicators that have high accuracy in
predicting bottoms have yet to convincingly signal one in the ongoing correction.
q While the indicators on selling intensity and price momentum have signalled a bottom,
volatility and some breadth indicators have not yet confirmed this. As confirmed by
record FPI outflows, this bear market may have hit the point of capitulation in Mar-20,
but this is likely to be followed by a period of apathy and lower volatility where we
reach a point of investor dismay on equity investment. Such conditions have typically
marked final bottoms, which may not have occurred yet.
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 Anatomy of a market bottom #2 India strategy

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Nifty consensus EPS cut by 5.9% in the last three months

Figure 1

This is the fifth instance of Nifty corrections from peaks to bottoms

a c.40% decline in the Nifty
since 1992

Source: Bloomberg, CLSA

Figure 2

FY21 Nifty consensus EPS Nifty Bloomberg consensus EPS downgrade over the last three months
has been cut only 5.9% in
the last three months….

Source: Bloomberg, CLSA

Figure 3

However, this still implies Nifty Bloomberg consensus EPS growth YoY % for upcoming financial years
17%/21% YoY growth in
FY21/22 over the 10%
expected for FY20

Source: Bloomberg, CLSA

Find CLSA research on Bloomberg, Thomson Reuters, FactSet and CapitalIQ - and profit from our evalu@tor proprietary database at clsa.com

2 April 2020 vikash.jain@clsa.com 2

 
   
 Anatomy of a market bottom #2 India strategy

Forward multiples are close to points of previous bottoms other than GFC
Figure 4

The near-40% decline in Bloomberg consensus 12-month forward Nifty PE

Nifty from its peak in mid-
January to the low of last
week took its PE
to a low of 11.3x.…

Source: Bloomberg, CLSA

Figure 5

This is within the Nifty Bloomberg one-year forward consensus PE at the peak and bottom of recent 10%+ declines
11.1-11.6x PE range that
acted as a bottom in three
of the previous large
declines in the last 15 years:
2005, 2006 and 2011

Source: Bloomberg, CLSA

Figure 6

Nifty one-year forward PE Percent of observation in respective Bloomberg consensus Nifty one-year forward PE range
was below 12 in only 6% of
days in the last 15 years

Source: Bloomberg, CLSA

2 April 2020 vikash.jain@clsa.com 3

 
   
 Anatomy of a market bottom #2 India strategy

Figure 7

Average Nifty return from various PE ranges

Source: Bloomberg, CLSA

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 Anatomy of a market bottom #2 India strategy

Highest relative attractiveness of Indian equities versus bonds in the last 15

years other than the GFC period of Oct-08 to Mar-09
Figure 8

The 10-year bond yield has The Nifty versus the 10-year bond yield
declined notably over the
past 18 months

Source: Bloomberg, CLSA

Figure 9

The past 15-year average Bond yield minus the Nifty’s earning yield
for the Nifty’s earnings
yield minus the bond yield
has been 0.9ppt

Source: Bloomberg, CLSA

Figure 10

This is the highest relative Bond yield at its peak and the bottom of Nifty in recent corrections of more than 10% for the Nifty
attractiveness of Indian
equities versus bonds in the
last 15 years other than the
GFC period of
Oct-08 to Mar-09

Source: Bloomberg, CLSA

2 April 2020 vikash.jain@clsa.com 5

 
   
 Anatomy of a market bottom #2 India strategy

Figure 11

Bond yield minus earnings Percent of observations in respective bond yield minus Nifty earnings yield range - last 15 years
yield was below -2 in only
5% of days in the
last 15 years

Source: Bloomberg, CLSA

Figure 12

Average Nifty return from various bond yield – earnings yield ranges

Source: Bloomberg, CLSA

2 April 2020 vikash.jain@clsa.com 6

 
   
 Anatomy of a market bottom #2 India strategy

Nifty’s 12-month trailing PE hit a low of 14.7x last week

Figure 13

Nifty trailing PE is below its Nifty one-year trailing PE

20-year average

Source: Bloomberg, CLSA

Figure 14

Nifty’s 12-month trailing PE Nifty Bloomberg one-year trailing PE at the peak and bottom of recent 10%+ declines
hit a low of 14.7x last week.
While this is a seven-year
low, it is far above the GFC
low of 9.1x and is also
above lows at the bottoms
of 2011, 2005 and 2004
(13.6x/11.9x/11.2x)

Source: Bloomberg, CLSA

Figure 15

Nifty trailing PE was below Percent of observations in Nifty respective trailing PE range in the last 20 years
-16 in 35% of days in the
last 20 years

Source: Bloomberg, CLSA

2 April 2020 vikash.jain@clsa.com 7

 
   
 Anatomy of a market bottom #2 India strategy

Figure 16

Average Nifty return from various ranges of trailing PE

Source: Bloomberg, CLSA

2 April 2020 vikash.jain@clsa.com 8

 
   
 Anatomy of a market bottom #2 India strategy

Last week’s low of 1.9x trailing PB for Nifty is near 18-year lows
Figure 17

Nifty trailing PB is below its Nifty one-year trailing PB

-1 standard deviation levels

Source: Bloomberg, CLSA

Figure 18

Last week’s low of 1.9x Nifty Bloomberg one-year trailing PB at the peak and bottom of recent 10%+ declines
trailing PB for Nifty is near
18-year lows and same as
the GFC low

Source: Bloomberg, CLSA

Figure 19

Nifty trailing PB was below Percent of observations in respective trailing PB Nifty range in the last 20 years
2 in only 6% of days in the
last 20 years

Source: Bloomberg, CLSA

2 April 2020 vikash.jain@clsa.com 9

 
   
 Anatomy of a market bottom #2 India strategy

Figure 20

Average Nifty return from various range of trailing PB

Source: Bloomberg, CLSA

Figure 21

With banks making up 30% Bank Nifty one-year trailing PB

weight in Nifty, last week’s
low of 1.3x on trailing PB of
the NSE bank index is still
much higher than
15-year and GFC lows of
0.94x in Mar-09.

Source: Bloomberg, CLSA

2 April 2020 vikash.jain@clsa.com 10

 
   
 Anatomy of a market bottom #2 India strategy

Bottom-up individual stock valuations have become quite attractive

Figure 22

Nifty 50 stocks consensus valuations premium/(discount) to five-year/10-year averages

Source: Bloomberg, CLSA.

2 April 2020 vikash.jain@clsa.com 11

 
   
 Anatomy of a market bottom #2 India strategy

Figure 23

Bloomberg consensus valuation comparison of Nifty 50 stocks with five-year average

Source: Bloomberg, CLSA

Figure 24

Almost 96% of Nifty Percent of Nifty stocks trading at respective ranges in terms of valuation
stocks are trading below
their respective five-year
average multiples, with
nearly 80% of these now
even 1 standard deviation
below their five-year
average valuations.

Source: Bloomberg, CLSA

2 April 2020 vikash.jain@clsa.com 12

 
   
 Anatomy of a market bottom #2 India strategy

Figure 25

Bloomberg consensus valuation comparison of Nifty 50 stocks with 10-year average

Source: Bloomberg, CLSA

Figure 26

Around 88% of stocks in Percent of Nifty stocks trading at respective range in terms of valuation
Nifty are trading below
their respective 10-year
average multiples.

Source: Bloomberg, CLSA

2 April 2020 vikash.jain@clsa.com 13

 
   
 Anatomy of a market bottom #2 India strategy

Key indicators with 67%-100% accuracy yet to convincingly confirm a bottom

Figure 27

The accuracy of seven key momentum indicators in predicting a Nifty bottom in corrections of more than 10%
Period Jan-04- Mar-05- Oct-05- May-06- Feb-07- Jul-07- Jan-08- Nov- Mar-15- Jan-18- Aug-18- Jun-19- Total Success Ongoing
May-04 Apr-05 Oct-05 Jun-06 Mar-07 Aug-07 Oct-08 10-Dec- Feb-16 Mar-18 Oct-18 Sep-19 instances ratio (%) 2020 fall
11 (#) status
Number of days from top to 124 52 24 35 26 28 294 410 359 53 59 108 78
bottom
Percent decline from closing (30) (12) (13) (30) (15) (12) (60) (28) (23) (10) (15) (11) (33)
top to closing bottom

Price momentum
14 day RSI N Y N Y N Y Y Y Y Y Y Y 12 75 Y
Implied volatility
Nifty VIX NA NA NA NA NA NA N Y Y Y Y Y 6 83 N
Selling intensity
Total daily trading value Y Y Y Y Y Y Y Y Y Y Y Y 12 100 Y
Total daily institutional NA NA NA Y Y Y Y Y Y Y Y Y 9 100 Y
trading value
Total daily FII trading value NA NA NA Y Y Y Y Y Y Y Y Y 9 100 Y
Net daily FII selling value NA NA NA Y Y Y Y Y Y Y Y Y 9 100 Y
Breadth
NSE Advance Decline NA NA NA NA NA NA NA Y Y Y Y Y 5 100 N
Percent of Nifty stocks N Y N N Y Y N Y Y Y Y Y 12 67 N
above 200DMA
Percent of NSE500 stocks at NA NA NA NA NA NA N Y Y N Y Y 6 67 Y
52-week lows
Source: Bloomberg, CLSA

Figure 28

The final bottom in the four Number of months taken to reach bottom from peak
previous falls took 10-27
months versus less than
three months in the
ongoing fall

Source: Bloomberg, CLSA

2 April 2020 vikash.jain@clsa.com 14

 
   
 Anatomy of a market bottom #2 India strategy

Momentum indicator trends in an ongoing correction

Figure 29

The Nifty has already Nifty price

declined 38% in the
ongoing fall

Source: Bloomberg, CLSA

Figure 30

The VIX has yet to Move in India’s VIX

show a divergence

Source: Bloomberg, CLSA

Figure 31

At the bottom, RSI was Nifty’s 14-day RSI

higher than the earlier low
hit during this decline,
showing a useful divergence
to confirm a bottom

Source: Bloomberg, CLSA

2 April 2020 vikash.jain@clsa.com 15

 
   
 Anatomy of a market bottom #2 India strategy

Figure 32

At the bottom, net selling Daily net selling value of FIIs

by FIIs was lower than the
earlier peak hit during this
decline, showing a useful
divergence to
confirm a bottom

Source: Bloomberg, CLSA

Figure 33

At the bottom, the total FII Daily FII gross trading value
traded value was lower than
the earlier peak hit during
this decline, showing lesser
selling pressure and a useful
divergence to confirm
a bottom

Source: Bloomberg, CLSA

Figure 34

At the bottom, the total Daily institutional gross trading value

institutional traded value
was lower than the earlier
peak hit during this decline
showing lesser selling
pressure and a useful
divergence to confirm
a bottom

Source: Bloomberg, CLSA

2 April 2020 vikash.jain@clsa.com 16

 
   
 Anatomy of a market bottom #2 India strategy

Figure 35

At the bottom the total Daily total market-wide gross trading value
market-wide traded value
was lower than the earlier
peak hit during this decline
showing lesser selling
pressure and a useful
divergence to confirm the
bottom

Source: Bloomberg, CLSA

Figure 36

The breadth of the Daily trend in NSE’s advancing minus declining stock
correction has yet to show
any notable improvement

Source: Bloomberg, CLSA

Figure 37

All the Nifty stocks were Nifty participants trading above their respective 200DMA
below 200DMA at the
bottom of market

Source: Bloomberg, CLSA

2 April 2020 vikash.jain@clsa.com 17

 
   
 Anatomy of a market bottom #2 India strategy

Figure 38

NSE 500 participants had NSE 500 participants trading at 52-week lows
lower stocks hitting
52-week lows compared to
the prior fall and thus
showing divergence

Source: Bloomberg, CLSA

2 April 2020 vikash.jain@clsa.com 18

 
   
 Important disclosures India strategy

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Companies mentioned
Adani Ports (ADSEZ IB - RS244.9 - BUY)
Asian Paints (APNT IS - RS1,603.2 - O-PF)
Axis Bank (AXSB IB - RS358.4 - BUY)
Bajaj (N-R)
Bajaj Auto (BJAUT IS - RS2,051.1 - SELL)
Bharat Petro (BPCL IB - RS303.2 - SELL)
Bharti Airtel (BHARTI IS - RS421.4 - BUY)
Bharti Infratel (BHIN IS - RS155.1 - BUY)
Bloomberg LP (N-R)
Britannia Industries (BRIT IS - RS2,564.8 - BUY)
Cipla (CIPLA IB - RS413.6 - BUY)
Coal India (COAL IS - RS139.4 - BUY)
Dr Reddy's (DRRD IB - RS3,096.2 - O-PF)
Eicher Motors (EIM IS - RS13,001.6 - O-PF)
Gail (GAIL IB - RS75.8 - BUY)
Grasim (N-R)
HCL Tech (HCLT IB - RS413.1 - BUY)
HDFC (HDFC IB - RS1,584.4 - BUY)
HDFC Bank (HDFCB IB - RS829.7 - BUY)
Hero Motocorp (HMCL IB - RS1,639.2 - SELL)
Hindalco (HNDL IB - RS91.7 - SELL)
Hindustan Unilever (HUVR IB - RS2,179.2 - O-PF)
ICICI Bank (ICICIBC IB - RS311.4 - BUY)
Indian Oil (IOCL IB - RS79.0 - SELL)
IndusInd Bank (IIB IS - RS342.2 - BUY)
Infosys (INFO IB - RS604.1 - BUY)
ITC (ITC IB - RS166.3 - BUY)
JSW Steel (JSTL IB - RS142.9 - SELL)
Larsen & Toubro (LT IB - RS774.8 - BUY)
Mahindra (MM IB - RS272.6 - SELL)
Maruti Suzuki (MSIL IB - RS4,243.6 - BUY)
Nestle India (NEST IB - RS15,668.7 - U-PF)
NTPC (NTPC IS - RS81.0 - BUY)
Oil & Natural Gas (ONGC IB - RS65.8 - BUY)
Power Grid (PWGR IB - RS154.4 - O-PF)
Reliance Industries (RIL IB - RS1,080.7 - BUY)
State Bank of India (SBIN IB - RS186.6 - BUY)
Sun Pharma (SUNP IB - RS343.6 - BUY)
Tata Consultancy (TCS IB - RS1,709.5 - BUY)
Tata Motors (TTMT IB - RS68.0 - BUY)
Tata Steel (TATA IB - RS266.4 - SELL)
Tech Mahindra (TECHM IB - RS511.2 - O-PF)
Titan (TTAN IB - RS936.8 - SELL)
UltraTech (UTCEM IS - RS3,140.7 - BUY)
UPL (UPLL IN - RS305.8 - BUY)
Vedanta (VEDL IS - RS62.6 - SELL)
Wipro (WPRO IB - RS189.8 - SELL)
Yes Bank (N-R)

2 April 2020 vikash.jain@clsa.com 19

 


 
 Important disclosures
Zee Entertainment (Z IB - RS120.8 - BUY)
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2 April 2020 vikash.jain@clsa.com
India strategy
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