A combination of strong macroeconomic factors, stable microeconomic factors, and increased foreign institutional investor (FII) flows since March 2023 have contributed to this rise. Valuations are now relatively more reasonable compared to the peak of the Nifty50 index in October 2021.
This can be mainly attributed to the 18-month correction experienced by the Nifty index, which remained range-bound despite a 34% increase in earnings in FY22 and an 11% increase in earnings in FY23.
Although the sentiment is currently positive, it is not yet euphoric! Despite the recent rally in the NSE Midcap 100 index (up 19% in three months), the index has only grown by 12% over the past six years (June 2017 to June 2023).
Similarly, the NSE Smallcap 100 index (up 20% in three months) has only grown by 7% over the same period.
The current market context prioritizes growth and earnings recovery. As interest rates stabilize and peak globally, as well as in India, we expect growth to remain the key driver of relative alpha creation!
In every recovery cycle, valuations always appear expensive because while the direction of recovery is apparent, the extent of recovery can be surprising. Therefore, as rates peak and the possibility of a rate cut in CY24 gains momentum, we anticipate the growth theme to dominate over value.
As the 1QFY24 earnings season begins, we believe three crucial factors will dominate investor discussions over the next 12 months:
1) Interest rates:
The gradual easing of interest rates depends on the growth/inflation paradox.
2) Election cycle:
India will face a significant election cycle with four state elections in CY23 followed by the 2024 General Elections. This may cause volatility as investors anticipate the outcomes and the impact it will have on ongoing reforms and policies facilitated by a single-party majority regime.
3) Global growth:
There is an expectation for global growth trends to improve from the current range-bound and slow pace. We believe part of the CY23 rally is due to the market anticipating events in CY24.
In Q1FY24E, we predict that Nifty earnings will grow by 25% YoY. Excluding global commodities (Metals and O&G), Nifty should see a 40% YoY earnings growth. Oil marketing companies (OMCs) are expected to experience a surge in profitability, with anticipated profits of INR405b in 1QFY24 compared to a loss of INR185b in 1QFY23, thanks to strong marketing margins.
The overall earnings growth is likely to be driven by domestic cyclicals such as the BFSI (banking, financial services, and insurance) sector and the automotive sector, which are expected to see a 47% and 11x YoY increase, respectively. The consumer and IT sectors are also expected to report healthy YoY growth at 19% and 16%, respectively.
However, the metals and cement sectors are predicted to drag down the overall earnings growth with declines of 53% and 17% YoY, respectively.
Looking ahead, we forecast that Nifty EPS will grow by 20% in FY24 and 15% in FY25.
Tata Motors: Buy| Target Rs 700| LTP Rs 624| Upside 12%
Jaguar Land Rover (JLR) is undergoing a transformation into a sustainable, electric-first modern luxury business, with the aim of achieving double-digit EBIT margins by FY26E and becoming net cash positive by FY25. This transformation will benefit Tata Motors, along with improvements in its supply chain, a commercial vehicle upcycle, stable growth in passenger vehicles, company-specific volume and margin drivers, and a significant expansion in free cash flow. Additionally, the approval of Tata Technologies IPO by SEBI last month, in which Tata Motors holds a 74.4% stake, may unlock further 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 strong asset quality and positive business growth momentum. The bank is experiencing a strong recovery across different segments, and its asset quality trends remain healthy with an industry-best Provision Coverage Ratio (PCR) of approximately 83%. We estimate that ICICI Bank will achieve a Return on Assets (RoA) and Return on Equity (RoE) of 2.2% and 17.6%, respectively, 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)