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Nifty target revised upwards to 19,425 levels!

ICICI Securities 26 Aug 2022

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.

Earnings Estimate

Revised Sensex & Nifty Target (Rolling 12 Months)

FY21

FY22

FY23E

FY24E

Nifty BPS (₹/share)

515

720

785

925

Growth (% YoY)

17.1%

39.8%

9.0%

17.8%

Earnings CAGR over FY21-24E

 

 

 

21.5%

Earnings CAGR over FY22-24E

 

 

 

13.3%

Target P/E Multiple on FY24E EPS

 

 

 

21.0

Nifty Target (using FY24E EPS)

 

 

 

19,425

Corresponding Sensex Target

 

 

 

64,700

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.

 

Nifty P&L (ex-BFSI space)

Jun-22

Jun-21

Mar- 22

YoY (%)

QoQ (%)

Sales

12,85,010

9,23,294

12,44,029

39.2

3.3

Total Expenses

10,76,675

7,40,447

10,19,475

45.4

5.6

Raw material

6,35,115

3,90,959

5,79,977

62.5

9.5

Employee

1,45,813

1,26,865

1,40,205

14.9

4.0

Other expenses

2,95,747

2,22,623

2,99,293

32.8

-1.2

Expenses (% of sales)

Total Expenses

83.8

80.2

81.9

359 bps

184 bps

Raw material

49.4

42.3

46.6

708 bps

280 bps

Employee

11.3

13.7

11.3

-239 bps

8 bps

Other expenses

23.0

24.1

24.1

-110 bps

-104 bps

Operating Profit

2.08.336

1,82,847

2,24,554

13.9

-7.2

OPM%

16.2

19.8

18.1

-359 bps

-184 bps

Other Income

18,119

24,565

22,673

-26.2

-20.1

Interest

26,981

26,032

26,402

3.6

2.2

Depreciation

58,813

53,205

59,463

10.5

-1.1

PBT

1,40,660

1,28,175

1,61,363

9.7

-12.8

Tax

41,526

38,649

42,189

7.4

-1.6

Tax Rate

29.5

30.2

26.1

-63 bps

338 bps

PAT

99,134

89,526

1,19,173

10.7

-16.8

 

Disclaimer: ICICI Securities Ltd. (I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400 025, India, Tel No : 022 - 6807 7100. I-Sec is a Member of National Stock Exchange of India Ltd (Member Code: 07730), BSE Ltd (Member Code: 103) and Member of Multi Commodity Exchange of India Ltd.(Member Code:  56250) and having SEBI registration no. INZ000183631. I-Sec is a SEBI registered with SEBI as a Research Analyst vide registration no. INH000000990. Name of the Compliance officer (broking): Mr. Anoop Goyal, Contact number: 022-40701000, E-mail address: complianceofficer@icicisecurities.com. Investments in securities market are subject to market risks, read all the related documents carefully before investing. The contents herein above shall not be considered as an invitation or persuasion to trade or invest. I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. The non-broking products / services like Research, etc. are not exchange traded products / services and all disputes with respect to such activities would not have access to Exchange investor redressal or Arbitration mechanism. The contents herein above are solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments or any other product.

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