Earnings outperform in Q4F23; Nifty target retained at 21,500

What's Buzzing 

Quarterly earnings in Q4FY23 were positive and 6% ahead of estimates. Incorporating revised PAT numbers for index constituents post Q4FY23, our forward estimates undergo a minor ~1% downgrade. Over FY23-25E, Nifty earnings are seen growing at a CAGR of 16.5%. Rolling over our valuations, we continue to value the Nifty at 21,500 i.e. 20x PE on FY25E EPS of Rs 1080/share. Corresponding target for the Sensex is at 71,600. These are our rolling 12 months’ index target. 

Context 

For the Nifty Index excluding the BFSI space, in Q4FY23, the topline was up 4.4% QoQ at Rs 14.1 lakh crore. EBITDA for the quarter was at Rs 2.4 lakh crore (up 6.8% QoQ) with corresponding EBITDA margins at 17.4%, up 40 bps QoQ. Gross margins for the universe improved ~240 bps on a QoQ basis. Net profit in Q4FY23 were at Rs 1.25 lakh crore, up 14.8% QoQ, aided by margin expansion and lower effective tax rate. 

Our Perspective 

In Q4FY23, outperformance was witnessed across BFSI, auto and metals space while rest of the sectors reported a broadly in line performance. The management commentary was upbeat on domestic demand prospects with the rural space seeing green shoots amid healthy Rabi crop and robust farm cashflows. On the domestic macroeconomic front, data came in encouraging with GDP growth for Q4FY23 coming in ahead of estimates at 6.1% with FY23 growth rate pegged at healthy 7.2%. Inflation also eased with latest CPI reading coming in at 4.7% with expectations ripe for interest rate upcycle nearing its peak. The government has also walked the talk on the fiscal consolidation front with fiscal deficit for FY23 at 6.4%. Encouragingly, FII flows have also turned positive starting from March 2023 (outflows in December 2022-February 2023) with March and April 2023 flows pegged at ~Rs 15,000 crore each and May 2023 flows at impressive ~Rs 40,000 crore. With macro stability at bay, stable commodity prices and corporate earnings showing resilience by growing in healthy double digits, we retain our positive stance on the domestic markets. We believe any dips should be used to build a long-term portfolio of quality companies that have lean balance sheets, are capital efficient in nature and have growth longevity. As structural bets, we continue to like the banking space, capex linked capital goods and domestic consumption plays including autos.