ETMarkets Smart Talk: We retain our cautious view on the Indian market for 2023: Kunal Vora of BNP Paribas India

We saw some volatility in the Indian market in December after benchmark indices hit fresh record highs. What is your view on Indian markets for 2023? What is your Nifty50 target?
With inflation concerns easing, global and Indian macro-outlook has improved slightly. However, we think the lag effect of sharp interest rate hikes of 2022 should weigh on the global growth outlook in 2023, with most economies likely to see a deceleration in growth, including India.

We retain our cautious view on the Indian market for 2023, though expect a single-digit return with a Nifty March 2024 target at 19,250 amid high volatility.

We believe there is a high level of optimism in the street’s earnings expectations, amid a weak global backdrop. On the liquidity front, there are risks emerging with Quantitative tightening, China reopening and rising term deposit rates.

Valuation comfort is also low as India’s current PE at c19x is higher compared to the long-term average of 16x.

The valuation premium to Asian peers is above the long-term average and the gap between bond yield and earnings yield is elevated at the current gap of c2%, we have seen negative one-year-forward returns in the past.

How do you see Indian markets stack up against their peers, especially China?
India’s outperformance vs Asia ex Japan including China over the last year was largely on a de-rating of the North Asian markets. With China’s re-opening, the consequent outperformance of North Asia could weigh on India’s performance as FIIs are likely to chase lower valuations.Throughout 2022, the primary focus of central banks remained on combating inflation, due to which they undertook massive rate hikes.

Going ahead, the market’s focus is likely to shift to the timing of the initial rate cut and the long-term inflation expectations, which is going to weigh on the flow dynamics for the entire emerging markets.

How do you see earnings to pan out in FY24? Do you see raw material prices, crude and other related shortages could weigh in?
As crude and other commodity prices ease from their peaks, margins are likely to recover from their FY23 levels. However, we think the current street expectations of a sharp margin recovery in FY24 and further recovery in FY25 seem too optimistic, considering the still-elevated prices of key commodities, elevated competitive intensity, and companies resuming their other operating expenses, which still pose a downside risk to earnings estimates.

Nifty’s actual EPS has ended lower than the Bloomberg consensus estimates every year in the last ten years, as the street generally tends to not fully factor in the risks.

Recently, the only meaningful upward revision to consensus estimates has been from the Covid-19 lows—as the street had become extra cautious about risks, translating into deeper estimate cuts—leading to subsequent upgrades as the recovery was swift.

Which sectors are you overweight on?
We like IT services, Financials, and Telecom, and have a tactical buy call on consumer durables. Despite the recent run up, we find financial services’ valuations reasonable, considering the improving credit growth and stronger and cleaner balance sheets.

IT Services valuation multiples have contracted sharply on DM recession concerns, but we expect the demand to remain resilient. In telecom services, we like the healthy growth and market-share gains for the top two players as the industry continues to consolidate.

We see a tactical opportunity in consumer durables, which have seen a sharp correction in earnings estimates and valuation multiples.

Which sectors are you underweight on?
We are underweight on Industrials as we expect its growth momentum to plateau in the near term, due to the global recession, a slowdown in domestic pent-up demand, rising interest rates, and a deceleration in activities prior to the elections in FY24.

We are UW on the overall consumption space like Staples and Retail as valuations have expanded significantly over the last decade even as earnings growth has moderated.

We expect a moderation in discretionary demand in FY24 due to factors such as the impact of an increase in interest rates on disposable income, moderation in wage hikes in sectors such as IT Services and a high base.

In the Auto sector, we are cautious on the two-wheeler space where we see a higher risk of EV-led disruption.

How do you see FIIs flows to pan out in 2023? Do you see the flows reversing? But retail money have been supporting the market which helped us outperform in 2022.
With China reopening and India’s elevated valuation premium, we see a risk of FII outflows in 2023. India has been a consistent recipient of FII flows with net inflows in 9 out of the previous 11 years.

However, that along with rising domestic flows has contributed to an expansion in valuation multiples. Domestic flows into Equities have been elevated in recent years as term-deposit rates were depressed and equity returns were strong.

Domestic inflows had been a key driver for India equities in 2022, despite USD17b of foreign outflows in 2022. However, we see a risk of moderation in direct retail flows as a result of increase in term deposit rates and moderation in equity returns, even as SIP flows remain resilient.

Any particular risks which Indian investors should watch out for 2023?
With the budget next week, we will watch out for any changes in the LTCG tax rates on equities.

Commodity prices have moderated from their peak and there is a consensus estimate of margin expansion in FY24 and FY25 – so any sharp rebound in crude and other commodities would be a risk.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)