By Siddhant Mishra
India closed 2022 as the second best performing market, but 2023 will be dominated by global factors, according to brokerages.
While the Nifty50 had delivered returns of 4% in rupee terms, in dollar terms it was -6%.
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According to the India market outlook by Standard Chartered, stretched valuation premiums — both absolute and relative to peers — is counter-balanced by robust domestic growth and expectations of resilient earnings growth. The brokerage has a neutral stance on Indian equities in 2023.
Within equities, StanChart is overweight on large-cap equities, given the relatively better macro fundamentals and greater margin of safety in terms of earnings and valuation vis-à-vis mid- and small-cap equities. The firm is overweight on domestic sectors thanks to the weak global macro-economic backdrop and greater earnings resilience. It forecasts a Nifty EPS growth of 15.5% and 18.3%, for FY23 and FY24.
It says stable domestic growth could support corporate revenue and profitability, while earnings forecast remains strong. Further, the recent equity pullback and strong earnings delivery has created some valuation buffer. Stable inflows from domestic investors, amid inflows into systematic investment plans, is a key support.
However, it highlights a potential global slowdown and probable downgrades to earnings expectations, the above-average equity valuations (both absolute and relative to peers), elevated bond yields and consistent FPI selling amid slowing DII flows, as risks to the positive view on equities.
The bank reports that valuations have moderated but are still rich compared to historical averages. The Nifty 12-month forward P/E is trading at 19.2x, below its peak of 23x, but higher than its long-term average of 17.1x. The price to book value ratio (P/B) at 3.3x and m-cap to GDP ratio at 102% are significantly above long-term averages. Mid-cap equities are trading at a 21% premium to large-cap equities, higher than the 10-year average premium of 8%.
It is overweight on financials, industrials and consumer staples.
On similar lines, ICICI Securities believes India fared well both relatively and in absolute terms with respect to economic and stock market performance in 2022. Going ahead, H1CY23 may be volatile as investors would want to know how fast rate hikes come to a halt, and the lag effect of a rise in interest rates on demand cycle and corporate EPS in India.
However, the brokerage believes this volatility will throw up attractive opportunities in domestic-oriented sectors like banks, capital goods, infrastructure and logistics, which will continue to be the beneficiaries of massive capex spend by the government/private sector and recovery in margins/profitability. Domestic sectors like retail, real estate and auto ancillaries (domestic focused) will also provide good opportunities for the medium to long term.
At the same time, it highlights a negative surprise from Covid erupting once again and the continued hawkish stance of central banks as key risks for CY23.
The brokerage estimates Nifty earnings growth at a CAGR of 15% in FY22-25E, primarily driven by improved asset quality and credit growth revival in the index-heavy BFSI space, pick-up in capex activity, and consequent execution in the capital goods domain, margins and profit recovery in auto, FMCG, metals, pharma and the oil & gas spaces.
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The optimism around Nifty earnings growth may have some merit.
According to Motilal Oswal’s ‘India Strategy’ chart book, the Nifty has consecutively delivered positive returns over the last seven years (CY16-CY22), despite disruptions such as demonetisation, GST rollout, Covid-19 outbreak, etc. The Nifty50 delivered a 14% CAGR (up 2.2x) during the period. This was the first instance of the Nifty posting seven successive years of positive returns, with 23 of 50 Nifty companies having delivered positive returns in five out of those seven years.
Motilal Oswal Financial Services, too, is overweight on the BFSI, auto, consumer and IT spaces.