Nifty has been flattish in the past 12 months while most of the major global markets have declined between 8 percent to 23 percent. Despite the outperformance versus global peers, Indian markets are currently undergoing uncertainty as a mix of global headwinds and subdued domestic demand are dragging otherwise strong fundamentals.
Despite the headwinds, domestic brokerage house Prabhudas Lilladher (PL) believes India is in a 'sweet spot'. It continues to believe that the structural story in India is intact. PL noted that Defence, Capex Recovery, Credit Growth revival, Rural demand, and Healthcare services are key investing themes for 2023. The brokerage has set a Nifty target for 2023 at 20,820, indicating an upside of 16 percent for the benchmark this year.
"Although we might see lesser rate hikes, stability and hopes of reduction seem farfetched as of now given inflation and employment data in the US. The covid scare in China and some developed countries and their impact on the supply chain need to be watched out for in the coming quarter, although India seems well placed as of now. We have seen meaningful correction in commodity prices of Crude, Metals, Palmoil and various Agri commodities, expect trends to remain volatile," cautioned the brokerage.
While cooling off inflation and good crop prospects are positive, however, demand trends have been divergent so far with tepid demand in Q3 in discretionary segments, it noted. India seems to be in a sweet spot led by a strong domestic demand base, large agriculture production for food grains and aggressive infra spends by the government, said PL.
It further stated that the strong balance sheets of banks, revival in credit growth and 36 percent higher capex announcements by companies YTD are positives and it expects higher spending on Rural, Agri credit and bottom-of-pyramid sections in the run up to 2024 elections should help revive demand.
Themes for 2023
The brokerage believes that the confluence of investment in Public Infra ( ₹1400 bn), PLI ( ₹220 bn), Defense, Digitisation and Data Centres will create big growth opportunities in coming years. However, it does not imply that structural themes of IT services, China+1 supply chain realignment in Pharma, Chemicals, Textiles and domestic demand, etc will fizzle out, it added. Overall, PL expects near-term volatility and back-ended returns in 2023.
In the last 12 months, Power, Banks, FMCG, and Capital Goods indices have grown by double digits while IT services, Reality, Healthcare and Consumer durables declined by double digits. Defense, QSR, Retail, Tourism and Specialty chemicals also reported strong gains. PL believes some of these will continue to play out in 2023 as well.
"We pitch Financials (Credit Growth), Defence, Capital Goods/Infra, Consumer and Auto (Rural Demand) and Hospitals (Healthcare Services) as key themes in 2023," said the brokerage.
Defence: PL believes India’s defence industry is on the verge of a steady and prolonged growth cycle in the coming years. India’s defence budget stood at ₹5.25 trillion for FY23, up 9.8 percent from the FY22 budget. Capital outlays in the defense budget have grown at a CAGR of 12.7 percent since FY19, from ₹995.6 billion to ₹1.60 trillion, as the government has put a strong thrust on modernization of the armed forces to replace its aging fleets and upgrade its platforms, systems, and equipment said the brokerage. Given the government’s defence production target of ₹1.75 trillion by FY25 from ₹948.5 billion in FY22 (implying a CAGR of 22.7 percent over FY22-25), PL expects the defense capital budget to grow in the mid-teens at least in the medium term.
Capex: New investment announcements reached an all-time high level of ₹19,600 billion in FY22 and for 9MFY23, it is already ₹15,000 billion. Execution has been tepid so far but an increase in non-food credit growth from 1.8 percent to 8.9 percent during 9mFY23 indicates a pick up in execution in coming years, noted PL. Chemicals and power have seen a healthy increase while real estate, metals and airlines have seen a decline in capex, it added.
PLI: The government has increased its thrust on localization and accelerated it through the announcement of Production-Linked Incentive scheme (PLI). The move is aimed at increasing domestic production and reducing imports of key items, said PL. PLI has covered 14 significant sectors of the economy (such as electronics, Automobile, food & beverages (F&B), etc) involving a total outlay of ₹3 trillion, it added. Capex from the PLI scheme is expected to cross ₹1 trillion from FY24 and is expected to contribute 20-25 percent of total capex in FY24.PL believes this will lead to strong demand for short-cycle products in capital goods space like bearings, construction equipment, material handling equipment, Welding consumables, Boiler & Heaters, abrasives, refractories, Industrial Tools, Industrial Ceramics, air compressors, smart infra products, etc.
Rural Revival: As per the brokerage, rural demand is a key trigger for overall growth as Rural India accounts for 65 percent population but accounts for just 30 percent of consumption spends in the economy. Lower per capita consumption levels, rising awareness and benefits of mobility, improved infrastructure, internet revolution and aspirations make rural India a key factor for acceleration in growth, it added. Although PL said that it was hopeful of rural demand revival from July/August, it has been delayed due to high inflation, uneven monsoon distribution and poor consumer sentiment.
Nifty EPS
NIFTY target at 20,820: PL estimates NIFTY EPS at 848.5, 968.6 and 1088.8 for FY23/24/25. This shows a growth of 11.2/14.2/12.4 percent for FY23/24/25. Its estimates are lower by 3.9 percent and 4.4 percent than consensus EPS estimates. NIFTY is currently trading at 19x one-year forward PE which is an 8.2 percent discount to the 10-year average of 20.7.
Base case: The brokerage values NIFTY at a 5 percent discount to the last 10-year average PE of 20.7x on December 2024 EPS of ₹1,059, and arrived at the December 2023 NIFTY target of 20,820 (21,035 earlier).
Bull Case: The brokerage values Nifty at a 5 percent premium to 10-year average PE (20.7x) and assigns a target of 23,012. (23,138 earlier).
Bear Case: The brokerage values NIFTY at a 20 percent discount to the 10-year average and arrives at a target of 17,533 (16,828 Earlier).
