These important factors would dominate H2FY24, says MOSL; lists top changes in model portfolio

October 2023 heralds the onset of a period of numerous events. Most recently, investors are closely watching developments in Israel as the war between the the Palestinian group Hamas and Israel escalates. While the violence may keep the markets volatile for some time now, it is unlikely to have a very significant impact, as per Motilal Oswal.

October commenced with the ICC Cricket World Cup interspersed with a big festive calendar, followed by several important state elections in November-December 2023. These landmark events then culminate into the crescendo for the General Elections of 2024. Also, the September quarter earnings will start later this week, which will also shift focus of the investors.

In a recent note, brokerage house Motilal Oswal said it sees these important factors dominating investor conversations in the second half of 2024:

1) Politics: The busy election calendar will kick off in Nov-Dec’23 with four big state elections, which will then set the stage for the General Elections of 2024. “While the pre-poll surveys so far indicated that the current regime would continue for an unprecedented third consecutive Lok Sabha term, we believe predicting an election outcome in India is always fraught with risk. Hence, markets are likely to remain volatile heading into the elections,” noted MOSL.

That being said, history however is in favor of a pre-election rally. In the last five consecutive Lok Sabha elections (i.e. from 1999 to 2019), Nifty has rallied 10-35 percent for six months until the announcement of election results (Nov-May period), informed the brokerage.

2) Secondly, the interest rates globally have witnessed a sharp tightening in the last two years. Recently, the US 10Y yield has hardened 50 bps to 4.8 percent, at a 16-year high, with the narrative of further rate hike/yield hardening building up. This can put pressure on global growth and global equity valuations, said the brokerage. Any change in this trend, either side, will have important implications for markets over the next couple of quarters, it added.

As per MOSL, equity markets would be keenly reacting to the rate/yield movements, especially Indian markets, given the expensive valuations prevailing in the broader mid-cap and small-cap segments.

3) Earnings: The brokerage expects MOFSL earnings to jump 40 percent YoY, while Nifty earnings are likely to grow 21 percent YoY in Q2FY24 (second quarter of FY24). MOFSL earnings also benefit from the low base (9 percent decline in Q2FY23). OMC’s profitability is anticipated to surge to ₹26200 crore in 2QFY24 from a loss of ₹2700 crore in 2QFY23, fueled by strong marketing margins. Ex-OMC, MOFSL/Nifty earnings are likely to increase 23 percent/15 percent YoY for the quarter. Overall, earnings growth is anticipated to be driven once again by domestic Cyclicals, such as BFSI and Auto, which are expected to post 26 percent and 87 percent YoY jump; while, Consumer and Cement would report a healthy 15 percent and 72 percent YoY growth, respectively. However, Technology and Metals are anticipated to report moderate earnings growth of 7 percent and 6 percent YoY, respectively.

4) Sector rotation: With the earnings outlook for Nifty and the broader MOFSL Universe remaining healthy and valuations of several sectors being at a premium to their long-period averages (Industrials, Consumer Discretionary, Mid-Caps and Small-Caps), the brokerage expects the sector rotation in Indian equities to continue.

Despite markets being close to their all-time highs, there are significant divergences in the performance of large-caps vs mid-/small-caps and across sectors. MOSL believes that in the midst of volatility over next couple of quarters, sector rotation could be an important driver than the general market uptrend. For example in CY23YTD, PSU Banks have outperformed Private Banks while Healthcare has outshined the IT sector, and in Consumption – Auto and Discretionary sectors have outperformed Consumer Staples, it informed.

It also sees valuations becoming an important driver for stock picking to drive outperformance given the divergence seen so far in CY23YTD. Some of the sectors, which are still trading at reasonable valuations include Banking, Auto, Healthcare and select large-cap IT stocks, it noted.

Model portfolio: Key changes

With these trends in mind going ahead, the brokerage has broadly maintained sector allocations and made marginal changes/tinkered with a few holdings given the expensive valuations in broader markets.

It remains overweight (OW) on Financials, Consumption, Industrials and Automobiles and is adding weights in Healthcare (making it marginal OW from Neutral) while remaining underweight (UW) on Metals, Energy, IT and Utilities and NEUTRAL on Telecom.

Financials: The brokerage has reiterated its OW stance on Financials and remains significantly OW on PSU Banks. Valuations in banking are reasonable after the recent underperformance even as asset quality continues to remain healthy, it said. It is playing both Value and Growth in Financials and now adding AU Small Finance Bank (AUBANK) to its model portfolio.

AUBANK delivered an impressive 54 percent/34 percent CAGR in deposits/loans over FY18-23. Scale-up of new products, widening geographical reach, aggressive investments in technology and thrust on physical expansion should support long-term growth, it explained.

It has also added Credit Access Grameen (CREDAG) to its model portfolio. With a strong rural focus and robust process discipline, it estimates CREDAG to deliver an AUM/PAT CAGR of 23 percent/32 percent over FY23- 25. Robust technology infrastructure would drive operational efficiencies and enable the company to deliver 4.9 percent RoA by FY25E, it predicted.

Consumption: As per the brokerage, the next two quarters will be driven by big events like the ICC Cricket World Cup and festive season and these can serve as positive catalysts in the short term for consumer demand. It believes several sectors in Consumer Discretionary can see demand uptick from these events – QSR, Hotels, Aviation, etc. The brokerage is OW on Consumption and playing the discretionary theme through Titan, Indian Hotels, Zomato, Lemontree Hotels, Metro Brands, Kajaria Ceramics and D-Mart.

Healthcare: MOSL has raised weights on Healthcare, adding CIPLA to model portfolio. CIPLA’s robust ANDA pipeline with complex products (inhalers, peptides, injectables, etc.) should drive consistent growth in the US generics segment, it said. A steady outperformance in the branded generics market (of India/SA) would enable a 16 percent earnings CAGR over FY23-25. It has also introduced Global Health (MEDANTA), to the model portfolio. MEDANTA is a leading tertiary care service provider with an established presence in North & East India. It has scaled up developing hospitals significantly to achieve breakeven in the first year of operations as against the industry timeline of 2-3 years, it explained. MOSL expects MEDANTA to deliver 14 percent/17 percent/26 percent revenue/EBITDA/PAT CAGR over FY23-25.

Industrials: Apart from being significantly OW on L&T, the brokerage has added Bharat Electronics (BEL) to its model portfolio. BEL is well positioned to benefit from: 1) healthy inflows received so far, 2) focus on indigenisation and its presence across a large number of segments, 3) a strong manufacturing base, 4) strategic technology tie-ups and in-house R&D, 5) improving share of non-defense segments and 6) focus on increasing exports, it explained.

Mid/small-caps: The sharp outperformance of mid-/small-caps and expensive valuations prevent it from raising weights further in these categories, stated MOSL. It has replaced some mid-caps and added Angel One (ANGELONE) and Bluedart Express (BDE) in the model portfolio.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie. We advise investors to check with certified experts before taking any investment decisions.