Indian markets have fallen around 9 percent in the first half of 2022 on the back of multiple weak domestic and global trends. From the ongoing Russia-Ukraine war to the rise in inflation, concerns regarding aggressive monetary tightening and continuous foreign investor outflows from Indian markets have kept the sentiment weak amongst investors.
Brokerage house Edelweiss believes that sees the current fall in Nifty as a correction within a structural bull market in India. Current investor sentiment is extremely bearish indicative of a good entry point, it advised.
The brokerage believes that the sectoral trend is now shifting from commodities to consumption, both in terms of performance and profitability and hence, it is bullish on autos, FMCG, Banks, IT and Real Estate.
It said that the consumption is likely to benefit from price hikes taken over the past one year with the commodity cool-off helping margins.
Edelweiss noted that India Inc's performance over FY20-22 has been driven by cyclical sectors while consumption has lagged. Commodities, BFSI and Exporters together contributed 89 percent of the incremental profits of Nifty over FY20-22, it pointed out.
The brokerage also highlighted that the commodities alone contributed 56 percent of the incremental profits over the same period.
But now, it expects this trend to reverse going ahead with the next leg in earnings growth to be driven by Consumption rather than commodities, however, BFSI and exporters would continue to be significant contributors, it added.
"Consumption companies have already been taking price hikes for compensating the cost inflation and are likely to benefit from stable/increasing margins while demand seems to be making a comeback post normalization of the economy," the brokerage said in its report.
It added that it expects automobiles and FMCG to contribute 28 percent of the Nifty earnings growth over the next 2 years. It prefers CVs>2Ws>PVs>Tractors in this order.
"Price inflation over the last 2 years has led to sharp growth in profitability of commodity and cyclical sectors as margins improved sharply. While sales growth for most consumption sector remained double-digit, the higher cost inflation led to tepid improvement in profitability," stated the brokerage.
Meanwhile, Edelweiss noted that private banks currently have the highest return on asset (RoA) in recent years and the lowest GNPA in the last 26 quarters while valuations are near multiyear low levels and hence it forecasts private banks to be a major driver of Nifty earning over the next 2 years as credit cycle continues on an uptrend.
Further, IT stocks valuation has also corrected 17-49 percent with margin pressure-related concerns already reflected in guidance/commentary. So, it remains bullish on medium terms prospects, however, considering the volatility it prefers large-caps and large mid-caps.
Commenting on the realty sector, it said that the real estate cycle also remains robust given lower inventory levels, affordability being the best in decades which is reflected in strong pre-sales and strong cash flows. Hence, it remains bullish on the sector.
Going ahead, the brokerage believes that there is a strong case for a relief rally especially given minor downgrades in forward earnings while multiples have seen a de-rating.
However, it added that it is important to analyze the possibility of a US recession that has been doing the rounds.
"We believe the fears are overdone given the drop in commodity prices since Mar-22 which could trigger a rethink for further rate hikes and indicate an interim top on Fed rates near 2.75-3 percent. Also, US economy has been displaying underlying strength highlighted by retail sales, PMI numbers and industrial output which continue to remain robust, conditions not reflective of a recession," it said.
Domestically, while the financial markets have been impacted by global disruptions causing lifetime high outflows by FIIs, the domestic economy is more resilient compared to the previous periods of shocks, noted Edelweiss. This resilience was reflected in the performance of India Inc. which has seen Nifty EPS grow by 35 percent CAGR over the past two years, it added.
