Neeraj Chadawar, Head - Quantitative Equity Research, Axis Securities, believes that the medium to long-term outlook for the overall market remains positive but expects volatility in the short run. In an interview with MintGenie, he said that he sees Nifty at 20,400 by December 2023-end, implying an upside of 12%. He advised investors that this is the right time to review the portfolio and to use dips in the equity market to increase the allocation to equity if it is under-allocated.
Edited excerpts:
After recovering in April, markets are continuing on a positive trend in May as well. What factors are contributing?
April proved to be an excellent month for equities worldwide, and most of the global indices are delivering positive returns. However, this recovery continued in the first half of May'23, and based on that Indian index has outperformed S&P 500, Dow Jones, FTSE 100 and Shanghai Composite in the last month till 17th May'23. FIIs have been returning to the Indian equity market with positive flows seen in the previous two months, which is led by the country's supportive valuations after the correction seen in Feb/Mar'23, robust economic outlook with improving high-frequency indicators, Q4FY23 earnings performance on an expected line, and the status-quo maintained by the RBI in April 2023 MPC. All these factors are contributing to the recovery.
Where do you see Nifty by Dec 2023-end? What kind of returns are you expecting?
The Indian economy stands at a sweet spot of growth and remains the land of stability against the backdrop of a volatile global economy. We continue to believe in the long-term growth story of the Indian equity market, supported by the emerging favourable structure, as increasing Capex enables banks to improve credit growth. Strong earnings trajectory continues in the NIFTY 50 universe. We foresee NIFTY EPS to post growth of 10%/16%/13% in FY23/24/25. Thus, in our base case assumption, we maintain our Dec '23 NIFTY target at 20,400 by valuing it at 20x on Dec '24 earnings, implying an upside of 12% from the current levels.
What factors have led to FIIs turning buyers again? How long do you see this trend continuing?
FTSE India is trading at a 76% PE premium to the EM index against the average premium of 40%. A few months back, the Chinese market had been underperforming other EM markets due to its zero-covid policy. However, our domestic market outperformed its peers during this period, leading to India's PE premium increasing to 110%. With the opening up of the Chinese economy for the first three months of 2023, its equity market has revived, and concurrently the massive divergence between the FTSE India and EM market started shrinking. This has led FIIs to park capital in the Chinese equity market for the first three months of 2023. However, this trend has reversed since April '23, and the FIIs were back with positive flows in the Indian equity market.
The worst of the FIIs outflow is now behind us as the strong earnings growth and economic recovery will play out in the remaining month of 2023. However, the direction of the bond yields, the dollar index, inflation, growth in the developed world, and the trend in commodity prices remain critical at this juncture.
What strategy would you advise all investors to follow in this uncertain market?
The current level of India's VIX is below its long-term average, indicating the market is in a neutral zone (neither panic nor exuberance). While the medium to long-term outlook for the overall market remains positive, we may see volatility in the short run, with the market responding in either direction. With this in view, the current setup is a 'Buy on Dips' market. We recommend investors maintain good liquidity (10%) to use such dips in a phased manner and build a position in high-quality companies (where the earnings visibility is relatively high) with an investment horizon of 12-18 months.
Any particular IPOs you are waiting for? How do you expect the IPO market to be in FY24?
The overall improved sentiments in the secondary market were the most significant driver for higher activities in the primary market during FY21 and FY22. However, this trend took a hit in FY23 due to inflationary pressure and the overall increase in the cost of capital. Now we are near the peak of the interest rate cycle. With moderation in inflation and improved overall liquidity going forward, we could see more traction in the primary market in FY24.
What is your view on new-age stocks? Most brokerages remain mixed, but do you see strong upside potential in them?
New-age tech stocks have specific challenges which vary from one tech company to another. However, these stocks have become relatively attractive with the price correction over the last year. Additionally, many companies are now focussing on profitability, which is a significant positive. Thus the time to accumulate some of the new edge stocks has arrived with an investment horizon of more than 12-18 months.
Now that the rate hikes seem to have ended, do you see investors moving back to equity from debt? Will this be the right move?
While the asset classes' leadership keeps changing in different market cycles, Gold has emerged as the best-performing asset class in 2022, led by geopolitical concerns and volatility in the equity market. Equities, on the other hand, were the best-performing asset class in 2021. For the first four months of 2023, Gold has outperformed all other asset classes by a superior margin. Nonetheless, the structural trend for the equity market continues to remain positive. For the next 6-9 months, the market may continue to be influenced by the evolving macroeconomic data points. Volatility, however, will likely continue for some more time before it concludes in a more concrete direction. Therefore, we maintain our 'Overweight' stance on Equity. We believe this is the right time to review the portfolio and use dips in the equity market to increase the allocation to Equity if it is under-allocated.
What sectors should one stay away from currently and why?
While Q4FY23 earnings largely align with the expectations so far, some disappointments were seen in the IT sector, primarily led by uncertain supply-side constraints. We believe growth in the IT companies is likely to moderate in FY24, and hence the IT sector would be in a 'wait & watch' mode, especially given the concerns in the global market. Financials held the Q4FY23 performance at the other end and accounted for most of the incremental growth in the corporate earnings. On a brighter note, Banks, Consumption, and Domestic Cyclical sectors are again in the limelight due to robust recovery in the domestic market. However, export-oriented themes will continue to be volatile due to volatility in the global market.
Key things to look out for in a stock before buying?
We recommended investing in quality companies to maximize the potential of wealth creation in the long run. One can identify the quality company by doing qualitative and quantitative checks. Below are the key things to look out for:
Qualitative check
· Management quality, integrity (capability of the management, capital allocation strategies,
· Corporate governance, performance during challenging times (on business as well as on the ESG front)
· Competitive edge in the industry (brand positioning, business moat etc., entry barriers)
· Industry trends and business cycles
· Potential for long-term growth in sales, market share gains, and profitability for the next several years
Quantitative check
· Consistent growth trend in its sales, gross margin, EBITDA and PAT
· Attractiveness of profit margins (sensitivity to competition, product profile, pricing power, etc.)
· Trend of declining interest costs/financial expenses or debt to equity.
· Consistently improving trajectory on return ratios, especially ROE and ROCE
· More stable earnings, which leads to lower earnings variability
· Consistently improving cash from operations
Is this a good time for short-term ‘buys’, or should investors focus more on their long-term portfolios?
Investors need to be patient in this market and invest in a staggered manner consistently. Also, investing in dips will work well in this market, and we recommend investors maintain good liquidity (10 percent) to use such dips in a phased manner and build a position in high-quality companies (where the earnings visibility is relatively high) with an investment horizon of 12-18 months.
