The financial year 2021-2022 (FY22) ended on a strong note for the Indian market with equity benchmark Nifty jumping 19 percent year-on-year (YoY) despite concerns over Covid-19, inflation, monetary tightening and geopolitical developments.
Domestic institutional investor (DII) flows into equities in FY22 were the highest ever at $26.8 billion against the outflows of $18.4 billion in FY21, while foreign institutional investors (FIIs) took out $17.1 billion after five consecutive years of inflows. The Nifty Midcap 100 (up 25 percent YoY) and Nifty Smallcap 100 (up 29 percent YoY) outperformed the benchmark.
As domestic brokerage firm Motilal Oswal Financial Services pointed out, utilities (up 63 percent), metals (up 62 percent), media (up 54 percent), oil & gas (up 42 percent), telecom (up 42 percent), and technology (up 40 percent) emerged as the top gainers among sectoral indices while private banks, consumer, autos, and healthcare underperformed in FY22.
The Nifty trades at a 12-month forward P/E (price-to-earnings ratio) of 19.8 times, near to its long period average (LPA) of 19.3 times (at a 3 percent premium). P/B (price-to-book ratio), at 3.2 times, is at a 21 percent premium to its historical average, Motilal Oswal said.
P/E and P/B are value metrics. While P/E measures the current price of a company's shares vis-a-vis its earnings per share, P/B measures the total market capitalisation of a company in relation to the book value (total assets).
India’s market capitalization-to-GDP ratio has been volatile, reaching 56 percent (of FY20 GDP) in March 2020 from 80 percent in FY19. It has rebounded to 115 percent at present (of FY22E GDP), above its long-term average of 79 percent. Healthcare and Oil & Gas now trade in a reasonable range to their LPA valuations, while technology, after the sharp run, trades at a 52 percent premium to its LPA. Financials are trading at near to their LPA on a P/B basis, Motilal Oswal said.
The new financial year is unlikely to see the gains we saw in FY22, say experts owing to rising inflation and increasing input cost which will eat up the earnings of India Inc.
As per a Bloomberg report, Morgan Stanley Chief US Equity Strategist Michael Wilson wrote in a note to clients that the recent rebound in equity markets will prove short-lived and he advised investors to look at bonds as economic growth slows.
However, the Indian market may not mirror the trends of its US counterpart precisely as the economy is showing signs of a rebound. If inflation remains under control, the market may clock gains in double-digits, say experts.
MintGenie has collated the views of top brokerages and experts on the market for FY23. Take a look:
Motilal Oswal Financial Services
As we step into FY23, we believe, the next two quarters are going to see a sharp margin impact and corporate commentaries will worsen before it gets better.
Secondly, while the Nifty has not seen much earnings downgrade so far (thanks to upgrades in metals and oil & gas and neutral to no impact in IT and BFSI), the broader universe is clearly bearing the brunt of commodity cost inflation – a trend we saw even in Q3FY22 corporate earnings season.
That said, if the input cost situations do not improve and price increases become inevitable, we are not too far away from some demand dislocation in an already weak economy. And this, at some point in time, will lead to an earnings downgrade even for the Nifty, in our view.
Nishit Master, Portfolio Manager, Axis Securities
We expect FY23 to witness continued volatility in equity markets, especially in the first half of the year with rising interest rates globally and high inflation, which is expected to persist.
In this scenario, we expect money to move from long-duration debt funds to equity funds in the second half, which should bode well for equities.
Our year-end target for Nifty is 20,200. Some sectors where we are positive include Metals, Hospitals, Hospitality, Oil Refining, Capital Goods, etc.
Deepak Jasani, Head of Retail Research, HDFC Securities
After a great FY22, Indian markets could consolidate for the better part of FY23. On the one hand, we have tailwinds like resumption in economic activities post-Covid disruption, rural economy on the mend, rising commodity prices, etc., and we also have a lot of headwinds.
Key among these include high inflation, likely rise in interest rates and withdrawal of liquidity, global slowdown due to geopolitical issues and supply chain disruption, commodity price rise (which is a boon as well as a bane), and fear of net FPI flows falling sharply due to reversal of carrying trade and high rates abroad.
The repercussions of over 2 years of disruption and the latest war on Indian macro and micro will be clear as we progress during the year.
A few second-order effects will also be visible, some of which may favour India. The risk appetite of Indians has remained high despite the volatile markets seen lately.
It will be crucial to track this closely along with the trend in markets abroad to get a handle on the amount and extent of volatility (upside or downside) expected.
Prashanth Tapse, Vice President (Research), Mehta Equities
Moderate returns are likely for the next financial year in the range of 9-11 percent.
Nifty bulls will continue to monitor developments in the Russia-Ukraine war and consider a tighter monetary policy from the Federal Reserve in the year ahead.
Sanjay Chawla, Head- Institutional Research, Emkay Global Financial Services
Crude and commodity prices and policy tightening are major challenges for the market in the next 12 months. The liquidity tightening by the central banks globally is a concern, domestically LIC IPO may impact liquidity in the short term.
Given the current scenario, we see Nifty50's fair value of around 19,000 by the end of FY23; we expect the aggregate profit growth of Nifty to be fairly resilient at about 20 percent in FY23. Emkay estimates Nifty50 PAT to increase by ₹1,24,600 crore to ₹7,294 in FY23.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.