_1641277474905_1654759776547.jpg&w=3840&q=75)
Domestic brokerage house ICICI Securities sees Nifty50 hitting a record high by March 2023 and has set a target of 19,000 for the benchmark for FY23. Nifty is currently hovering around 16,400, down nearly 13 percent from its current high of 18,604.
As per the brokerage, the receding Omicron worry, stabilising commodity prices and bond yields and hopes of scaling down of Russia-Ukraine crisis are likely to bode well for equity valuations.
"CY22 began with the omicron scare, followed by the sudden escalation of the Russia-Ukraine conflict in Mar’22, thereby pushing the world into an unprecedented phase of nuclear brinkmanship. This impacted the ‘equity risk premium’ (reflected in a spike in VIX). It also resulted in a surge in commodity prices, especially crude oil, thereby triggering an inflation scare. This was followed by the more than expected hawkishness of the US Federal Reserve and India’s RBI resulting in an increase in the ‘risk-free rate’ as sovereign bond yields spiked and acted as a double whammy for equity valuations," stated the brokerage.
However, post the initial spurt, omicron has receded sharply while commodity prices and bond yields have started to stabilise, it noted, adding that the Russia-Ukraine conflict will likely be scaled down from global nuclear brinkmanship to a local conflict. A dip in the latest inflation data for the US, general cooling down of commodity prices and the expected increase in oil output by OPEC+ will also add credence to the peak inflation argument, ICICI pointed out.
Valuations not high anymore
ICICI noted that the above-mentioned trends are visible in the fear index (VIX) receding and will most likely put a floor on equity valuations on a 1-year forward P/E basis, which fell from around 23x in Oct’21 to less than 18x during the May’22 sell-off.
It added that high-frequency indicators so far appear robust and indicate that an economic recovery is on course.
“Q1FY23 is the first quarter of no COVID restriction on movement since the onset of the pandemic in 2019. High-frequency indicators for the quarter so far indicate robust economic recovery, which should gather momentum going forward,” said the brokerage.
Key positives
Strong manufacturing & services: ICICI noted that the average PMI-Manufacturing at 54.7 and PMI-Services at 58.4 for Q1FY23 (Apr-May’22) are robust. Export growth at 15.45 percent YoY and GST collections at Rs1.41trn for May’22 are also robust. Formal job hiring robust for Apr-May’22 and is on a structural uptrend, it added.
Core sector and credit growth improving: Core sector growth for Apr’22 also improved to 8.44 percent YoY and non-food credit growth for May’22 came in at 11.2 percent YoY.
IMD forecast is of a normal monsoon in CY22 which will also prove beneficial for monsoon-based companies.
High tax buoyancy helps fiscal position although trade deficit is expanding: Fiscal deficit for FY22 was lower at 6.7 percent vs the Budget estimate of 6.9 percent as gross tax revenue at ₹27.1 lakh crore surpassed the earlier estimate. However, the trade deficit remains elevated and rose to US$23.3 billion in May’22 driven by a rise in gold imports.
Earnings: The March quarter (Q4FY22) earnings remained robust despite the challenging environment with the aggregate corporate ‘profit to GDP’ ratio reaching 4.5 percent in FY22.
Top stock picks
The brokerage stated that it is overweight on stocks driven by investment rate, savings rate, credit growth, exports, and pent-up discretionary consumption.
With that in mind, its top picks include SBI, Axis Bank, HDFC Bank, Aditya Birla Capital, SBI Life, Larsen & Toubro, NTPC, NHPC, GAIL, Oil India, Coal India, UltraTech Cement, Bharti Airtel, Tata Comm, Gujarat Fluorochemicals, Phoenix Mills, Brigade Enterprises, Greenpanel Industries, Indian Hotels, Jubilant Foodworks, Metro Brands, Sapphire Foods, Inox Leisure, TVS Motors, and Eicher Motors.
