Q4FY23 earnings season has broadly been in line with expectations but sector specific divergences were observed.
HDFC Securities continues to believe that Nifty will remain rangebound this calendar year, with an expectation of single-digit returns by the end of 2023, Varun Lohchab, Head of Institutional Research says in an interview with Moneycontrol.
With an experience of 18 years in Indian equity markets across leading buy side and sell side firms such as Fidelity, Franklin Templeton and Jefferies, Lohchab believes sectors such as capital goods, infrastructure, power, and cement are riding the investment wave and should post strong figures in the forthcoming quarters.
Post Q4FY23 results, HDFC Securities has observed marginal upgrades in FY24 earnings primarily led by large banks. These upgrades in the banking space have counter-balanced downgrades noticed in the IT sector led by the absence of strong growth levers in the sector, he says.
Q. Do you expect significant divergence in the equity market in the rest of the calendar year?
We continue to believe that Nifty will remain rangebound this calendar year, with an expectation of single-digit returns by the end of 2023. That being said, there are certain pockets in the market that will outperform as a result of continued earnings momentum and supporting valuations.
Sectors such as capital goods, infrastructure, power, and cement are riding the investment wave and should post strong figures in the forthcoming quarters. Few bottom-up ideas in these sectors have the potential to generate decent returns.
Q: Your take on the March quarter, FY23 earnings and management commentary?
Q4FY23 earnings season has broadly been in line with expectations but sector-specific divergences were observed. While on one side, BFSI space continued to ride the credit growth and benign credit quality wave, managements indicated sustained deposit mobilisation pressure. Larger banks have been shoring up prudent reserves in case of any asset quality concerns in the future.
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Commodity consumer sectors reported sequential improvement in operating margins on the back of softer commodity prices. IT sector failed to offer any strong visibility about future topline growth or deal pipeline robustness.
Various managements have been highlighting that there are early signs of a possible rural recovery which has been elusive since Covid days. Overall, we believe the earnings of our coverage universe will still be driven by sectors like large banks and capex beneficiary sectors.
Q: Where do you want to add significant exposure in terms of sectors, after March quarter earnings?
We observe that the government has been preferring “investment” over “consumption” in the GDP equation as its strategy to drive the country’s growth. Given the government’s clear focus on investment-led growth, we believe capex beneficiary sectors such as capital goods, infrastructure, power, cement and select financials should be preferred.
We have been positive on the outlook of large banks given benign asset quality and a strong credit growth environment. We maintain our stance and believe that in the medium term, large banks should be preferred. Additionally, a few select fundamentally strong NBFCs can be looked at as well.
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Q: Do you see a possibility of a revision in earnings growth for FY24 and FY25 after the FY23 earnings season that is near its end?
Post Q4FY23 results, we have observed marginal upgrades in FY24 earnings primarily led by large banks. These upgrades in the banking space have counter-balanced downgrades in the IT sector led by the absence of strong growth levers in the sector.
There are small upgrades in the sectors such as industrials and power as well. Further, downgrades are observed in the sectors like energy, IT and cement. Overall, we believe FY24 Nifty earnings growth would be limited to ~12 percent while the consensus estimate for the same is 14 percent.
Q: Are the valuations reasonable in consumer staples?
You’ll be hard-pressed to find a bargain in the consumer staples space. We don’t think that the current valuations correctly reflect the uncertainty surrounding rural demand. A slight correction in valuations is possible if the rural recovery does not pan out as expected by industry managements.
Q: Do you expect the rate hike to continue in the next policy meetings by Federal Reserve, considering the latest economic data points and Fed officials commentary?
After raising rates for 10 consecutive meets in the last 14 months, policymakers now appear to be divided on further monetary tightening. As we believe, inflation levels are still not within the comfortable zone and hence this wouldn’t be appropriate to assume that rate cuts are a given in 2023.
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In our view, forthcoming Fed actions would be more data-dependent and in the absence of any inflation shocks, at best we can expect a pause in this current rate cycle.
Q: Do you see the possibility of contraction in net interest margin for all players in the banking space going ahead?
Management commentaries of most of the banks included comments about acute deposit mobilisation pressure which is pushing them to elevate rates for garnering liabilities. As interest rate hikes appear to be taking a pause for the time being, there is limited scope for pushing up asset yields.
After a period of experiencing remarkable NIMs, the lending financials space is set to witness margin normalisation in the forthcoming quarters. Banks with higher CASA ratios and a higher proportion of variable rate assets will be in a healthier position to handle the margin compression pressures.
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