A combination of strong macros, stable micros, and a sharp recovery in FII flows post-March 2023 has driven the ascent. Valuations today are relatively more reasonable than the October 2021 peak of the Nifty50.
This is largely attributed to the 18-month correction experienced by Nifty when it was range-bound even as its earnings were up 34%/11% in FY22/FY23.
While the sentiment is upbeat now, we do not believe it is euphoric yet! The recent rally in NSE Midcap 100 index (up 19% in three months) notwithstanding, the index has compounded at a modest 12% over the last six years (Jun2 2017- June 2023).
Similarly, the NSE Smallcap 100 index (up 20% in three months) has compounded at a measly 7% over the same period.
The current market context is giving precedence to growth and earnings recovery themes. As interest rates stabilize/peak globally as well as in India, we expect growth to remain the most important driver of relative alpha creation!
We believe that in every recovery cycle, valuations always look expensive because even though the direction of recovery is self-evident, the quantum of recovery can surprise.Thus, as rates peak and the narrative of a CY24 rate cut gains momentum, we expect the growth theme to dominate value.
As the 1QFY24 earnings season commenced last week, we see three important factors dominating investor conversations over the next 12 months:
1) Interest rates:
Gradual easing of interest rates depends on the growth/inflation paradox.
2) Election cycle:
India will be heading into a big election cycle with four state elections in CY23 followed by the 2024 General Elections. This will induce its volatility as investors pre-empt the outcome of the 2024 election given its significant bearing on the continuation of the current reforms and policy initiatives facilitated by a single-party majority regime.
3) Global growth:
A pick-up in global growth trends from the current range-bound and anemic print. A part of the CY23 rally is also a reflection of the market pre-empting CY24 events, in our view.
In Q1FY24E, we expect Nifty earnings to grow 25% YoY. Excluding global commodities (i.e. Metals and O&G), Nifty should post 40% YoY earnings growth. OMC’s profitability is anticipated to surge to INR405b in 1QFY24 from a loss of INR185b in 1QFY23 owing to strong marketing margins.
Overall earnings growth is likely to be driven once again by domestic Cyclicals such as BFSI and auto, which are expected to post 47% and 11x YoY jump while consumer and IT are likely to report a healthy 19% and 16% YoY growth, respectively.
Metals and cement are anticipated to drag the aggregates with a 53% and 17% YoY decline in earnings, respectively.
We now forecast the Nifty EPS to grow 20%/15% in FY24/FY25.
Tata Motors: Buy| Target Rs 700| LTP Rs 624| Upside 12%
JLR is transforming into a sustainable, electric-first modern luxury business, enabling it to deliver double-digit EBIT margins by FY26E & turn net cash positive by FY25.
Tata Motors will benefit from ease in supply-side issues, CV upcycle, stable growth in PVs, company-specific volume/margin drivers, and sharp expansion in FCF. Tata Motors received SEBI approval last month for Tata Technologies IPO where it holds a 74.4% stake which could unlock value for Tata Motors shareholders.
ICICI Bank: Buy| Target Rs 1150| LTP Rs 961| Upside 20%
ICICI Bank is well positioned to deliver steady earnings, supported by pristine asset quality and strong momentum in business growth.
The bank is seeing a strong recovery across segments, while asset quality trends remain healthy with industry-best PCR at ~83%. We estimate ICICI to deliver RoA/RoE of 2.2%/17.6% in FY25.
(The author is Head – Retail Research, Motilal Oswal Financial Services)
(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)