Global markets started the month of February 2023 with continuation of optimism from the previous month. However, risk off set in as the markets started to re-price the peak Fed rate higher after the recent inflation surprise. Most equity markets ended in the negative for the month, with Hong Kong and Nasdaq being the weakest. In India, NIFTY50 too was down by 2.0% accompanied by broader markets, with both BSE Midcap and Small Cap 250 indices being down 2.0% and 2.9% respectively. Despite a very good- and forward-looking finance budget presented by the Finance Minister, concerns over the collateral damage caused by sharp fall in Adani group stocks led to cautiousness and nervousness among investors. FIIs continued to be sellers of Indian equities to the tune of ~USD 682 mn while DIIs continues the trend of absorbing the FII outflows by pumping in another USD 2.3 bn.
Quarter results update :
Q3FY23 was a tepid quarter with NIFTY50 earnings rise 12% YoY led by the BFSI sector. Investment-led sectors such as capital goods and cement posted a healthy topline while consumption-driven sectors such as FMCG and durables found their pricing abilities put to the test. BFSI had a good quarter with margin expansion and improved asset quality. Exports were steady in both services and manufacturing sectors led by tier-I IT and electronics manufacturing services (EMS) players, though the pharma sector saw continued generics price erosion in the US.
The month of February witnessed many headwinds and led to general risk-off for global equity markets. Indian markets also witnessed nervousness with broader markets seeing sharp corrections. However, on multiple parameters there is now reason to be optimistic.
The sharp fall in Adani group stocks led to concerns of collateral damage on banks and generally on the perception of Indian economy. However, there seems to be little reason to doubt on the serviceability of debt by the group as most borrowings are backed by profit generating assets. The secondary market fund raising of USD 2 bn by promoters has eased the nervousness to a large extent with group stocks recovering sharply.
Recent economic data points from US and other major economies are showing that global growth remains steady so far. While in China economic activity (PMIs, home sales, travel) has rebounded sharply post the reopening of the economy, in the US, labour market strength is supporting domestic demand. Globally, lower commodity prices are translating into lower input costs which in turn is helping in cooling inflation down. However, the pace of moderation is weaker in US than earlier anticipated. Core inflation also remains sticky in both US and Europe. This is likely to put pressure on central banks to keep rates elevated for long. However, we believe that inflation will cool off sharply by mid-2023 and ease the upward pressure on interest rates.
Rural economy and domestic agri industry is positioned to benefit from a bumper rabi crop (output up by 6% YoY) coupled with stable crop prices (wheat up 20% YoY) leading to strong cash flows for farmers. There is fear of poor monsoon emanating from potential El-Nino conditions. However, reservoir level remains above the ten-year average (all India level) and with farmers entering kharif season with solid cash flows, impact on overall rural / Tier 2 demand should not be material.
Last couple of quarters quite a few sectors faced headwinds, due to sharp volatility in input prices as also the impact of higher energy and freight costs. However, all these cost headwinds: input, energy, and freight; have subsided meaningfully and we expect margins to start improving from March 2023 quarter and fully normalizing in the June 2023 quarter. This should lead to earnings growth trajectory for Indian corporates trending back to 15%+ annually.
There have been no returns delivered by Indian equities over the last 18 months. This, along with the almost 25% growth in earnings during that period, has led to the valuations of Indian markets come almost to 10-year trend. NIFTY50 now trades at ~18x FY24 and ~16x FY25 earnings, providing opportunities to generate decent returns. The sharp fall in broader markets have also opened-up avenues to generate alpha over the market returns through investing in the less obvious names.
We are now very constructive and believe that the next two years can be good period for investors in Indian equities.