India performed well for particular reasons. India is an oil-importing country and oil prices have declined considerably in the recent period. We roughly saved $40 billion a year. The government used that money to correct the finances. We also benefited because of the singleparty rule and a strong central government. The makeup of the Indian economy is also different. We have lesser dependence on commodities than most other economies. This helps our performance in periods when commodities are weak. Moreover, this is the only country with a large economy, growing well and at the same time seeing interest rate reduction. We do not see this combination in any other emerging markets or developed markets. Also, markets tend to do similarly when the source of money is same. However, this time around, the buoyancy in our markets is more on account of local investors than international ones.
While markets may be higher in terms of average PE, we believe they would sustain their levels and retain an upward bias. This is because the drop in risk-free yields is meaningful and sustainable. Drop in risk-free yields lowers the discount rate used for computing the present value of future cash flows. This increases the value of the same. A 10% drop in yields makes sustainable PEs to be over 10% higher. If 16.5x is the 10year average one-year forward PE, the drop in yield would mean that 18.5x is the new normal. We also believe that FY18 would witness strong earnings growth with tailwinds from deferred demand from the demonetisation period. Q1 is showing strength and quick indicators like cement demand and prices and auto sales are strong. Q2 would have the benefit of inventory build-up post GST and then the second half would have the benefit of a very low base of FY17. Overall FY18 growth may turn out to be better than expected.
We believe GST will help organized sector players win market share. With the government continuing on the path of fiscal prudence, inflationary pressures are definitely lower. INR has been strengthening and there is an outside possibility of an improvement in the credit rating of the country. Oil prices are soft. Overall the macros seem to be very supportive. Given the backdrop, we do expect earnings of India domestic focused businesses to be strong going forward. We now expect Q1FY18 no’s to deliver growth over the same period of last year. Q2 would benefit from inventory build-up in the channel, which would provide further support to the numbers. Q3 and Q4 have the benefit of a low base. Overall, as said elsewhere, we are very positive that FY18 could see growth better than analyst projections unlike the past few years.
We believe that NBFC, Autos and ancillaries, Tyres and Textiles are the high quality and cheap areas of the market. While we continue to have well diversified portfolios, while still being focused on just 20 names in a concept, most of the new names that we have bought belong to these sectors. NBFCs have pricing power with regard to the end customer and in a scenario of lower interest rates, are seeing NIMs expand. Insurance asset management businesses are looking at strong growth post demonetization as equities present a more compelling opportunity at this juncture.
The consumption buoyancy is helping businesses like cars. Tyres are benefiting from lower Chinese competition and more brand power as the market share of cars and two wheelers have risen versus that of trucks. Moreover, technology improvements and advent of products like tube-less tyres has increased per tonne gross margins of the business significantly. Cotton home textiles are benefiting from higher Chinese wage and cotton costs, which is helping Indian players win market share.
We are bottoms-up stock pickers and have names in our portfolios across the spectrum of sectors. We focus on quality and governance. We avoid sectors where these attributes are less present. Also, we strive to have long-term portfolios and hence, try to avoid volatile commodity businesses which are less predictable.