Indian equity markets defied all odds and rallied in August; Will this bull run continue?

The Indian equity markets finished the month of August on a strong note. Indian markets quickly rebounded from Monday's low and surged by close to 3 percent, fuelled by the drop in oil prices and the Dollar Index. The Sensex ended with a gain of 1,564 points, or 2.69%, at 59,537.07, while the Nifty closed at 17,759.30, up 446 points, or 2.58%.

On Tuesday, crude oil prices fell by close to 6%. Brent crude oil dropped to around $99.31 per barrel after Iraq’s state-backed Somo stated that the country’s oil exports are unaffected by civil unrest due to the political exit of a prominent cleric, Trading Economics reported. WTI fell more than 5.5% to fall below $91.64 per barrel.

The Indian rupee notched its biggest one-day gain in a year on Tuesday after the RBI stepped in to prevent the currency from trading under 80 per dollar in the previous session, traders told Reuters.

The Nifty continued its rally since July and gained 3.50% in August, from 17,158.10 to 17,759.30 points. Furthermore, it has risen 16.96 percent since its June 15 low of 15,183. In the same time frame, the Sensex has gained 3.42%.

In addition to that, the Nifty outperformed its major Asian counterparts so far in August. The major Asian indices, the Shanghai Composite, the Kospi, and the TAIEX, have lost 1.00 percent, 0.05 percent, and 0.19 percent, respectively. The Nikkei 225 and Jakarta Composite Index gained 0.72 percent and 2.99 percent in the same period, respectively.

Meanwhile, after two consecutive downward revisions, BofA Securities has sharply revised its Nifty forecast in the range of 18,500-19,500 points by December. It cited the recent buying spree by foreign portfolio investors, pumping in more than ₹44,000 crore this month, along with continuing domestic flows, strong fiscal fundamentals, and buoyant tax collections as key positives for the upper range, while the negatives include a faster-than-expected revival in China, weakening in global macro/geopolitics in the reminder of the year, PTI reported.

It added that a mild recession in the US or muted global growth is now priced in. However, a sharp impact on global growth would lead to a risk-off trade, impacting EMs.

Further, it says by December 2023, $3.1tn of quantitative tightening (QT) by the central banks of major economies is now priced in, and its potential acceleration is a risk.

Earlier in May, the global brokerage firm reduced the Nifty's year-end target to 16,000 from 17,000, and in June, it lowered the Nifty target for the second time to 14,500 from 16,000. However, in the second week of August, it raised the Nifty December target marginally to 15,600 points.

On the other hand, analysts at ICICI Direct expect the Nifty to touch an all-time high of 19,425 in the next 12 months. Despite weak April-June earnings, the recent drop in commodity prices has provided some respite to the markets, reported by Financial Express.

Nifty Q1FY23 results-few hits and a few misses

The first quarter of the current fiscal (Q1FY23) saw aggregate top-lines improving, reflecting improved discretionary consumption and a recovery in investment demand. The aggregate net sales of Nifty 50 companies grew by 31.7% YoY and 0.9% QoQ to Rs. 15 trillion in Q1FY23 as compared to 21.7% YoY and 9% QoQ in the previous quarter and 38.3% YoY and -6.8% QoQ in the corresponding quarter last year when the economy was hit by the second wave of COVID infections. While the YoY growth was the highest in four quarters, sequential growth moderated, reflecting the impact of weakening global demand and the recent fall in commodity prices, according to the NSE Corporate Performance Review report.

Sector-wise, energy was the biggest contributor to YoY revenue growth in Q1FY23, accounting for nearly 50% of the absolute YoY increase in Nifty 50 earnings. The report said that excluding energy, revenue growth came in at a much lower 18.9% on a YoY basis and declined by 4.5% on a sequential (QoQ) basis.

Input costs continued to weigh on operating margins

The EBITDA for the Nifty 50 universe excluding financials grew by 11.4% YoY and -8.1% QoQ in the June quarter, which is the lowest growth rate in seven quarters (vs. 12.2% YoY and 4.9% QoQ in the June quarter). Operating margins also contracted by 446bps YoY and 222bps QoQ to 17.9%, weighed down by global commodity price inflation and an increase in salary and wage bills, the report said. 

The raw material costs for the Nifty 50 companies (excl. financials) rose by 66.2% YoY (13.4% QoQ) vs. 34.2% YoY (12.1% QoQ) in the previous quarter. Total expenses (excluding interest and depreciation) rose by 48.1% YoY (vs. 39.2% YoY increase in net sales) and 8.6% QoQ (vs. 3.3% QoQ increase in net sales), indicating negative operating leverage, where an increase in total operating costs has outpaced the increase in revenues persistently, thereby leading to margin contraction.

Sector-wise, barring health care, consumer discretionary, communication services, and industrials, all others witnessed a contraction in operating margins. Within the Nifty 50 universe, 29 and 26 of 39 non-financial companies registered an EBITDA expansion in Q1FY23 on a YoY and QoQ basis, the report added.

Financial sector drove profit growth in Q1FY23

The aggregate adjusted PAT growth for the Nifty 50 companies came in at an eight-quarter low of 15.4% YoY in Q1FY23 and declined by a huge 17.2% on a QoQ basis. Higher input cost pressures outweighed resilient consumption demand in the quarter gone by. Financials contributed significantly, thanks to higher lending rates, improving asset quality, and lower provisioning, accounting for 60% of the absolute profit increase on a YoY basis.

The energy sector contributed another 25%, as gains in gross refining margins of upstream oil and gas companies more than made up for weak earnings by downstream oil marketing companies. Excluding financials and energy, the aggregate net profit of the Nifty 50 universe grew by a much lower rate of 4.6% YoY and -21.4% QoQ.

Within the Nifty 50 universe, 37 and 19 companies posted increases in net profit on a YoY and QoQ basis, respectively. Sectors that posted YoY contractions in profits include materials, which are hit by high operating costs, and technology, which is harmed by high employee costs.

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