Earnings downgrade likely for Nifty, says Motilal Oswal; HDFC, SBI, Infosys among top stock picks for FY23
Financial Year 2021-22 ended with markets clocking second-best returns in seven years, with NSE Nifty 50 recording an impressive 19% on-year gain despite challenges on multiple fronts. In FY23, there is a possibility of earnings downgrade even for the Nifty, said domestic brokerage firm Motilal Oswal. “If the input cost situations do not improve and price increases become inevitable, we are not too far away from some demand dislocation in an already weak economy. And this, at some point in time, will lead to earnings downgrade even for the Nifty,” it said. While HDFC, ICICI Bank, SBI, Infosys, HCL Tech, L&T are among top large cap stock picks for FY23, Jubilant Foodworks, SAIL, Ashok Leyland, Dalmia Bharat, Zee Entertainment feature among top midcap, smallcap investment ideas.
Markets in FY23: Next two quarters to see a sharp margin impact
“As we step into FY23, we believe, the next two quarters are going to see a sharp margin impact and corporate commentaries will worsen before it gets better. Secondly, while the Nifty has not seen much earnings downgrade so far (thanks to upgrades in Metals/O&G and neutral to no impact in IT/BFSI), the broader universe is clearly bearing the brunt of commodity cost inflation – a trend we saw even in 3QFY22 corporate earnings season. That said, if the input cost situations do not improve and price increases become inevitable, we are not too far away from some demand dislocation in an already weak economy. And this, at some point in time, will lead to earnings downgrade even for the Nifty, in our view,” the brokerage said.
Top stock picks for FY23
Largecaps: Housing Development Finance Corporation Ltd (HDFC), ICICI Bank, State Bank of India (SBI), Infosys, HCL Technologies, Larsen and Toubro (L&T), Titan, Godrej Consumer, Apollo Hospitals and Ultratech Cement.
Midcaps/Smallcaps: Jubilant Foodworks, SAIL, Ashok Leyland, Dalmia Bharat, Zee Entertainment, Whirlpool India, Canara Bank, G R Infraprojects, Zensar Tech, Angel One
Market FY22 recap
In FY22, DII flows into equities were the highest ever at $26.8 billion v/s outflows of $18.4 billion in FY21. On the other hand, FIIs witnessed equity outflows of $17.1 billion after five consecutive years of inflows. The Nifty Midcap 100 (+25% YoY) and Nifty Smallcap 100 (+29% YoY) outperformed the benchmark. All sectors delivered positive returns with top gainers in the sectoral space being Utilities, Metals, Media, Oil & Gas, Telecom, and Technology. On the flipside, Private Banks, Consumer, Autos, and Healthcare underperformed.
Nifty gainers, laggards
The overall breadth was positive, with 37 Nifty constituents closing higher. Bajaj Finserv (+76%), Hindalco (+74%), Titan (+63%), Tata Steel (+61%), and ONGC (+60%) were the top performers. On the other hand, HDFC Life Insurance (-23%), Hero Motocorp (-21%), Shree Cement (-19%), BPCL (-16%), and HUL (-16%) were the top laggards.
India market capitalization-to-GDP ratio rebounded to 115% of FY22E GDP
According to Motilal Oswal analysts, two-thirds of the sectors are trading at a premium to their historical averages. The Nifty trades at a 12-month forward P/E of 19.8x, near to its long period average (LPA) of 19.3x (at 3% premium). P/B, at 3.2x, is at a 21% premium to its historical average. “India’s market capitalization-to-GDP ratio has been volatile, reaching 56% (of FY20 GDP) in Mar’20 from 80% in FY19. It has rebounded to 115% at present (of FY22E GDP), above its long-term average of 79%. Healthcare and Oil & Gas now trade in a reasonable range to their LPA valuations, while Technology, after the sharp run, trades at a 52% premium to its LPA. Financials are trading at near to its LPA on a P/B basis,” it said.
India among leaders in March
India remained among the key global market leaders in March this year. Brazil (+6%), Russia MICEX (+6%), Japan (+5%), India (+4%), the US (+4%), Indonesia (+3%), Korea (+2%), and the UK (+1%) closed higher in local currency terms. Over the last 12 months, MSCI India (+21%) has outperformed MSCI EM (-13%). It has outperformed MSCI EM by 186% over the last decade. “In P/E terms, MSCI India is trading at a 92% premium to MSCI EM, above its historical average of 60%,” said Motilal Oswal.