India’s economic outlook remains robust and corporate earnings growth is also likely to be in double digits, but steep valuations are expected to keep the benchmark Nifty50 range bound in the 18,000-19,000 zone in 2023, Jefferies India said.
“With India among the best performing markets globally in 2022 and hitting new highs recently, valuations at 20x PE and 225 bps on yields gap are trending above 1 standard deviation levels, and remain a key overhang for market performance in 2023,” Mahesh Nandurkar, head of research at Jefferies, said in his report.
However, India is a “buy on dip” market for the brokerage and it is betting on the domestic-linked sector given the strong economic growth prospects.
Large banks, automobiles, consumer staples, and real estate are the major sectoral picks for the brokerage.
, , , , , , Co, , , , Larsen & Toubro, and are its top bets.
Growth Levers
The property sector in India is seeing a multi-year pent-up demand and is more dependent on the pricing sentiment instead of mortgage rates. As a result, the 225-basis-point hike in repo rate by the Reserve Bank of India since May this year hasn’t affected the housing demand.
Moreover, the corporate sector leverage is at a cyclical low, with India among the few countries globally seeing a double-digit decline in corporate debt to GDP ratios.
In 2023, Jefferies expects private sector spending on capital investments to rise.
On the earnings front, India Inc is expected to post another 15%+ growth in FY24, even after assuming significant earnings cuts. 39 out of 65 domestic companies are likely to report a fall in margin in FY23.
“In FY24, we expect 58 out of 65 companies to show margin improvement. Key sectors with margin improvement are expected to be autos, cement, (consumer) staples and industrials,” it said.
Currency, Fund Flows
India’s foreign exchange reserves, despite a recent bounce, are down by $130 billion from the October 2021 peak.
The import cover of 9-months is at a 7-year low, and given that trade deficit is hovering near record highs, Jefferies expects the import cover to drop further to 7.5-months in 2023. The balance of payments is also likely to stay in deficit next year, and therefore, the rupee should continue weakening against the dollar.
While a strong dollar does not bode well for equities, the brokerage expects foreign funds flows to rise in 2023 after the record outflows in 2022.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)
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