Brokerage firm Phillip Capital advises investors should use correction in the market to build a strong portfolio for the long term as India's long-term growth prospects remain intact.
It, however, added that the economy will go through a phase of softness and consolidation in the financial year 2023-24 (FY24) due to the higher base of the last two years, steeper interest rates, and a global slowdown.
Phillip Capital has a Nifty target of 18,500-19,500 for March-September 2024.
"For India, we assign a PE (price-to-earnings ratio) of 18-18.5 times to our FY24-25 Nifty50 earnings estimates (assuming a 6 percent discount to current earnings per share growth estimates of 18 percent and 15 percent in FY24 and FY25, respectively), and forecast a Nifty target of 18,500-19,500 for March-September 2024," Phillip Capital said.
"While the Indian economy should fundamentally be on a strong footing in FY25, the return of a formidable BJP in the 2024 elections and a controlled inflationary and interest environment can induce markets higher (19,500-20,000)," said the brokerage firm.
The brokerage firm said supportive government policies and the long-term potential of the Indian economy will continue to augur well for capital formation, but other GDP components like consumption and exports may weaken in FY24.
Growth to accelerate from FY25
For FY24, Phillip Capital estimates India's GDP growth of 5.5-6 percent and CPI inflation at 4.8-5.2 percent (assuming stable commodity prices).
From FY25, the brokerage firm expects a 6.5-7 percent plus GDP growth while it says Consumer Price Index (CPI), or retail inflation, may fall back to RBI’s comfortable levels of approximately five percent.
The brokerage firm also expects lower interest rates, a stronger currency, higher capital flows, and continued government and RBI policy support will significantly boost Indian equities from FY25.
Phillip Capital believes manufacturing, exports, and capex (public+private) may fare well in the long run, generating higher employment and consumption.
The brokerage firm added that corporate earnings are currently estimated to be extremely strong but there may be some disappointment and cuts ahead.
The brokerage firm said the calendar year 2023 will see an economic slowdown as elevated inflation and rising growth will lead to more interest rate tightening followed by rates being held higher for longer.
As a result, equities should continue to be under pressure in the near-to-medium term. However, if Indian and global central bankers call out the peaking of interest rates at current levels, equities will respond positively, the brokerage firm said.
"While medium-term challenges will mar stock returns across the board, from a long-term perspective, we remain positive on cyclicals versus discretionary; sector preference – industrials, cement, defence, financials, and logistics," Phillip Capital said.
Phillip Capital said it assessed the performance of equities and FII (foreign institutional investors) flows when interest rates were near their previous peak (2018-19).
“In that period, markets majorly corrected before reaching the peak and rallied after interest rates stagnated. During this period, FIIs were net sellers but turned into buyers after the interest-rate peak. The differentiating factor this time is that rate tightening has been swifter and larger,” said the brokerage firm.
Positives and negatives for the Indian economy and equities
Phillip Capital highlighted three key positives for the Indian economy and equities:
(1) Continued focus on indigenisation, exports (through PLIs) along with alternative technologies.
(2) Government policies: Innovative, long-term vision, multiplier benefits, timely execution.
(3) Rising public and private capex, led by higher long-term demand, to have a multiplier impact.
Phillip Capital also highlighted five key negatives for the Indian economy and equities:
(1) Volatile FII flows assuming further tightening.
(2) Elevated interest rates due to sticky inflation and global tightening.
(3) Weaker demand scenario impacted by a higher base, inflation, and interest rates.
(4) Discretionary consumer spending to trend lower.
(5) Global slowdown and liquidity tightness.
The brokerage firm expects mixed corporate earnings and stable corporate margins. It said DII (domestic institutional investors) flows have been decent or even strong so far, but future trends could be mixed as debt offers an attractive investment opportunity.
Higher commodity prices, sticky inflation, sharp adverse impact on growth, geopolitical factors, poor execution and decision-making pre-election by the Indian government are the key risks for the Indian economy and the market, Phillip Capital said.
Top picks of Phillip Capital
L&T, Siemens, Thermax, HAL, Bharat Electronics, UltraTech Cement, Shree Cement, JK Lakshmi Cement, ICICI Bank, HDFC Bank, Axis Bank, BAF, CIFC, SRF, HUL, Britannia, GCPL, ITC, M&M, Maruti Suzuki, Tata Motors, SAIL, Tata Steel, Infosys, LTIMindtree, Persistent, Trent and Shoppers Stop, Orient Electric, Finolex Cables, and PG Electroplast.
Disclaimer: The views and recommendations given in this article are those of the broking firm. These do not represent the views of MintGenie.