BFSI, auto & consumer discretionary sectors eyed in Q2FY23! Motherson Wiring & SBI top buys: Siddhartha Khemka

While most global equity markets are down 20-25% in YTD, India is flat and steady (in local currency). This outperformance is driven by several key factors such as: a) strong corporate earnings growth over the last two years (Nifty profits up 70% during FY20-22) and expectations of a healthy performance over FY22-24; b) resilient domestic equities inflow (YTD DII equity inflow of Rs 2.5 lakh crore); c) deft macroeconomic management by the Reserve Bank of India (RBI) and the government that has helped India stand out in an otherwise volatile and panic-stricken world.

Markets witnessed elevated volatility in Q2FY23 triggered by global and macro headwinds. The US Fed raised interest rates by 75 bps driving a broader risk-off in the global equity markets with the dollar index rising 17% YTD.

The Indian currency depreciated 2.3% in September even as forex reserves decline $96 billion in YTD. The RBI hiked its key policy rate (repo) by 50 bps to 5.9% on 30th September and revised its GDP growth forecast down to 7% from 7.2% earlier.

We expect Nifty50 earnings to remain flat on a YoY basis in Q2FY23. The aggregate performance is adversely impacted by a sharp drag from global commodities.

Excluding metals and O&G, we expect Nifty to post a solid 30% earnings growth, fuelled by BFSI and autos. Apart from Metals & O&G, the earnings will be dragged by cement and healthcare packs.

Sectors focused on domestic consumption/investments are likely to outperform the sectors dependent on global demand/cyclical/commodities.

With softening of commodity prices, H2FY23 should see a good rebound. We now expect the Nifty EPS to grow 11%/21% in FY23/FY24, respectively.

Financials alone are likely to account for two-thirds of the incremental FY23E earnings in Nifty.

Going forward, as we enter the festive season, we expect domestic demand recovery to continue and propel discretionary consumption in India after a pandemic-induced hiatus of two years.

That said, given the multiple moving parts (rates, currency, bonds, and geopolitics), we expect volatility to remain elevated but directionally, we believe, trends will get better.

In our recent interaction, corporates across the sectors highlighted the potential for margin expansion in H2FY23E as the benefits of recent compression in commodity prices manifest themselves in P&L going forward.

The lean balance sheets of both corporate India and the banking sectors are encouraging corporates to come out and talk about CAPEX after several years of indifference.

We are positive on BFSI, auto and consumer discretionary.

Motherson Wiring: Buy| Target Rs 102| LTP Rs 87| Upside 17%
MSWIL enjoys market leadership in the Indian wiring harness industry with over 40% market share, with strong headroom for a sustained increase, benefiting from megatrends witnessed in the automotive industry (premiumization, electrification, connected vehicles etc).

Good margins, higher asset turn, and lower CAPEX requirements make wiring businesses enjoy high capital efficiencies and superior cash-flow generation.

We estimate revenue/EBITDA/PAT to grow 18%/23%/25% CAGR over FY22-25E, which would improve RoIC from 49.5% in FY22 to 61% by FY25E.

: Buy| LTP Rs 555| Target Rs 625| Upside 12%
SBI has one of the best liability franchises (CASA mix: ~45%). This puts it in a better position to manage pressure on yields and support margin to a large extent in a rising interest rate scenario.

The outlook remains encouraging as the bank benefits from the re-pricing of its floating rate loan portfolio, amounting to 74% of total loans.

We expect the net interest income (NII) to grow at an average of 16% over FY22-24. We expect SBI to report a strong earnings progression right from 2QFY23, resulting in a 29% earnings CAGR over FY22-24.

We estimate an RoA/RoE of 0.9%/17% in FY24.

(The author is Head – Retail Research, Limited)


(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)