Growth at reasonable valuations will continue to be the theme to generate returns in 2023, said brokerage house Motilal Oswal (MOSL) in a recent report. As per the brokerage, the current challenging backdrop and valuations not offering any material margin of safety (Nifty at 19x, in line with its long-period average) are key reasons for investors to shift towards the 'growth at reasonable valuations' theme.
"In CY22, we saw this play out to an extent, e.g. PSU Basket bounced back with PSU Index outperforming Nifty by 19 percent while the recently listed new-age companies declined more than 50 percent. Bank Nifty was up 21 percent while the Nifty IT index lost 26 percent," the report pointed out.
In 2023 as well, the brokerage believes financials have more legs to perform as the sector is offering the most consistent earnings visibility – BFSI earnings in Nifty have expanded to ₹2.07 lakh crore in FY23E from ₹45,000 crore in FY18 – with the best balance sheet quality in more than a decade, resilient credit growth, healthy provision ratios, and reasonable valuations.
In technology, it noted that valuations have largely corrected and large-cap names offer value. However, given the evolving global macros around recession and rate hikes, the sector can see some more correction, said MOSL.
Meanwhile, consumption-based themes, despite the growth slowdown, are still expensive and investors should wait for growth to revive before turning more constructive, advised the brokerage. Within domestic cyclical, it expects cement to be a better play than automobiles. This apart, it also sees tractions in select pockets where domestic demand is intact e.g. travel & tourism, hospitals, real estate and select discretionary sub-categories such as jewelry.
2023 outlook and trends
2022 was a challenging year on the macro front with inflation, interest rate hikes and geopolitics driving the narrative considerably. The intent of the global central banks to increase interest rates aggressively to curb inflation and slow down growth seems to have started playing out, as evident in economic growth contraction across countries worldwide, said the brokerage.
As we usher in CY23, there are three important variables that will dominate investor conversations, as per the brokerage.
First, India’s sharp outperformance in CY22 and significant premium on valuations (MSCI India at 132 percent premium v/s MSCI EM, down from the recent high of 165 percent) has increased the risk where the Indian markets can remain flattish again or underperform (unlike CY22) while global markets recover from the lows (Hang Seng Index up 45 percent since Oct’22). This is more so given the emerging downside risks to domestic corporate earnings, explained MOSL.
Second, the likely economic growth deceleration (2HFY23 GDP expected to grow 4.3 percent according to RBI) can put near-term earnings at risk. The channel checks across consumption-based sectors and early pre-quarterly releases from corporates reveal some moderation in consumption space already, it stated.
Third, the CY23 political calendar is quite busy with nine states going for elections and BJP is currently in power in five states. Investors will be mindful of the government’s growth impetus ahead of this busy election calendar as it will set the tone and momentum for the 2024 general elections, it added.
Model Portfolio
Growth at reasonable price drives MOSL's model portfolio’s construction approach. It remains overweight (OW) on financials, capex and autos. “We are raising weights in Healthcare after the recent underperformance,” it said. Meanwhile, it is underweight (UW) on metals, energy and utilities.
It remains significantly OW on PSU banks. Axis Bank is MOSL's key alpha pick in private banks for CY23. Among financials, it estimates Bajaj Finance to deliver an AUM/PAT CAGR of 26 percent/35 percent in FY25.
It has also introduced Poonawalla Fincorp in the portfolio. PFL has laid down a robust foundation for sustainable profitability through initiatives that will lead to lower operating costs, higher business volumes and robust asset quality, said MOSL.
On IT, the brokerage is neutral with the entire weight being allocated to large-caps: Infosys, TCS and HCL Tech.
In the consumer space, MOSL has added Britannia to the model portfolio. In staples, it continues to maintain weights in ITC and GCPL. In discretionary, its longstanding preference with Titan remains. Jubilant FoodWorks and Metro Brands constitute its other discretionary preferences, said the brokerage.
Among auto, MOSL added Samvardhana Motherson as it believes the worst is behind for the company and operating performance should start recovering, led by improving supply-side issues and stable costs. It also maintained its allocations in Maruti and Ashok Leyland.
In the oil and gas space, the brokerage added ONGC as one of its top ideas for 2023. High dividend yield, attractive valuations and progress on two aspects – oil & gas production and domestic APM gas price – drive investment thesis, it said.
Meanwhile, in healthcare, it added Sun Pharma to the model portfolio. The increased prescription base for the specialty portfolio, robust franchise building in branded generics, niche ANDA pipeline awaiting approval, and controlled cost management drive its positive view.
In the mid/smallcap space, the brokerage introduced APL Apollo Tubes and Dalmia Bharat in its model portfolio.
TOP PICKS
Mid-Caps – Jubilant Food, Angel One, Lemon Tree, Samvardhana Motherson, APL Apollo, and Dalmia Bharat.
