Nifty target revised upwards to 19,425 levels!

The recent cool off in key commodity prices viz. metals, crude among others comes as a breather for global equity markets, which are currently wary of ongoing geopolitical issues and interest rate hikes by central banks to control inflation. Management commentary is upbeat on demand prospects and recovery in margin profile amid muted corporate earnings for Q1FY23, which witnessed low single digit QoQ growth in topline and double digit bottom-line decline with pressure on gross margins. Nifty EPS for Q1FY23 came in at ~| 177/share, down 14% QoQ. Major disappointment came in from the oil & gas sector wherein marketing margins came in lower than estimated. However, capital goods, metals & mining and pharma space surprised on the positive side. Domestically, with a capex cycle revival on the anvil (public + private) coupled with strong consumer demand across most categories (passenger vehicles, retail, etc.)

Indian markets witnessed a smart recovery and were up ~18% from recent lows. We remain constructive on the overall markets and believe the present market offers an attractive risk-reward play to build a long term portfolio of quality companies, which have lean balance sheets, are capital efficient in nature and have growth longevity. On the economic parameters front, domestically, data points are encouraging in terms of GST collection, PV sales order-book and e-way bill generation (four-months high of 7.6 crore in July 2022). Monthly GST collection came in at a three month high of | 1.5 lakh crore for July 2022 vs. | 1.45 lakh crore in June 2022 & | 1.41 lakh crore in May 2021.

Corporate earnings for April-June 2022 (Q1FY23) came in muted. Topline growth at the Nifty level (ex-financials) was at 3.3% QoQ. Operating profit, however, was down 7.2% QoQ factoring in pressure on margins, which for the quarter was at 16.2%, down 184 bps QoQ. Gross margin decline came in sharp at 280 bps QoQ. PAT in Q1FY23 was down 16.8% QoQ, primarily tracking a decline in margins as well as lower other income (as most companies reported MTM loss on investment book due to rise in yields), further aggravated by higher effective tax rate (29.5% in Q1FY23 vs. 26.1% in Q4FY22). At the Nifty level (including financials), broader sequential trend continued with 1.4% QoQ growth in topline while PAT was down 13% QoQ, a tad lower than ex-financials subset (16.8% QoQ) on account of outperformance by the BFSI domain wherein asset quality trend continued to improve led by healthy recoveries and steady incremental slippages.

Incorporating revised PAT estimates post Q1FY23, our forward estimates witness a decline of ~2%. Over FY22-24E, albeit on a high base, Nifty earnings are seen growing at a CAGR of 13.3%. We now value the Nifty at 19,425 i.e. 21x PE on FY24E EPS of | 925 wherein we marginally increase our PE multiple to 21x vs. 20x earlier tracking cool off in commodity prices and consequent positive impact on inflation and resultant modest rate hike velocity by central banks vs. the aggressive stance depicted earlier. Corresponding target for the Sensex is placed at 64,700. These are our rolling 12 months’ index targets. As structural bets, we like capex linked capital goods, domestic consumption plays including autos and PLI oriented domestic manufacturing play.

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