A plethora of challenges including geopolitical tensions with the onset of the Russia-Ukraine conflict, weak global macros, higher inflation, significant FII outflows from India, and the recent banking crisis in the US and European banks plagued FY23 to significantly. Despite the extreme volatility in the market in the previous financial year, the year ended on a completely flat note with the Nifty50 index up just 0.01 percent in FY23.
"The fiscal year turned out to be highly volatile and ended with higher interest rates, reallocation of FII flows from India to other emerging markets (trading at a discount to India), domestic consumption slowdown in H2FY23 as well as the US and European banking crises. The intent of the global central banks to raise interest rates aggressively – to curb inflation and slow down growth – appears to have started playing out, as evident from the economic growth contraction across countries even as inflation remains stubbornly high," said domestic brokerage house Motilal Oswal in a recent note.
In this era of higher interest rates, growth stocks suffered the most, especially those that disappointed on profit expectations and those with long-duration cash flows, ‘value’ theme has made a comeback, highlighted MOSL.
The brokerage noted that sectors with reasonable valuations (P/E <20x) and resilient earnings - Financials, Automobiles and Utilities - outperformed while Commodities (Metals and Oil & Gas), Healthcare and Technology dragged.
The consumer sector’s performance was disproportionately led by ITC, the best-performing Nifty stock in FY23, it further mentioned.
Among Nifty companies in FY23, ITC, M&M, Britannia, NTPC and HUL were the top 5 performers while Wipro, Tech Mahindra, Divi’s Lab, Hindalco and Bajaj Finserv were the key laggards.
Further, FY23 was a year of a reality check for the new-age technology companies (Nykaa, Zomato, PB Fintech, Delhivery, etc.) as well, which saw significant price correction in the range of 20-60 percent YoY, after the euphoria in FY22, added the brokerage.
Model Portfolio
The correction and breather in markets, especially broader markets, have thrown up interesting opportunities and made the risk-reward relatively more favorable, said the brokerage. It also informed that it has carried out several important changes in its model portfolio that are detailed below.
It has maintained an ‘overweight’ stance on Financials, Capex and Autos and upgraded Consumption to ‘overweight’. Meanwhile, it is ‘neutral’ on IT and Healthcare while retaining an ‘underweight’ stance on Metals, Energy and Utilities. It has also reduced the rating for the Energy sector to ‘underweight’.
Financials: The brokerage has reiterated its ‘overweight’ stance on Financials and remains significantly ‘overweight’ on PSU banks.
After the underperformance over the last three years, the brokerage has raised weight in HDFC Bank, which has maintained solid momentum in business growth. "Deposit growth has been particularly impressive and this positions the bank well ahead of the merger while also enabling healthy growth trends for the merged entity. Stable CASA ratio amid heightened competition for liabilities and steady trends in Retail and Commercial Banking will support fee income and margins," it explained.
Within NBFC, it has added Mahindra Financials to the model portfolio and believes that the various strategic initiatives undertaken by the management, if executed correctly, have the potential to script a credible transformation.
IT: There is no change in its stance in this space, said MOSL. It is neutral with the entire weight being allocated to large caps including Infosys, TCS and HCL Tech.
Consumption: In staples, MOSL continues to maintain its weights in ITC, Britannia and Godrej Consumer, whereas in discretionary, its long-standing preference with Titan remains. Meanwhile, it has also reintroduced Indian Hotels to its model portfolio.
"Hotels’ business cycle remains favorable and Indian Hotels is poised for strong growth fueled by improvement in average room revenue and occupancy, higher income from management contracts and launch of new brands," it explained.
It has also added Vedant Fashions to its model portfolio as the firm has established itself as a strong and dominant brand within the highly underpenetrated and unorganized ethnic wear segment (20 percent branded). MOSL expects the company to report a revenue/PAT CAGR of 21 percent/22 percent, respectively, over FY23-25, driven by 15 percent footprint additions, limited competition, growing cultural pull and a strong brand recall.
Automobiles: The brokerage has added M&M to the model portfolio since it finds the company's risk-reward quite attractive as core valuations are cheap at 12.5x/11.0x FY24E/FY25E Core EPS. While the tractor business may see some near-term headwinds, the recent stock price correction is largely factoring in the weak tractor cycle in FY24E, it noted.
It has also added Bharat Forge to the portfolio, which has been expanding its revenue/ profit pool through the addition of aluminum forging, a new industrial and defense (ex-guns) segment. This will not only diversify its revenue streams further but also be the key driver of consolidated revenue over the next five years, added MOSL.
Oil & Gas: In this space, the brokerage has increased its weight in Reliance Industries. MOSL believes RIL's valuations now offer a better risk reward after the recent underperformance. Petrochem margins have also improved on the back of improved demand from China and would benefit the standalone segment, further stated the brokerage.
Real Estate: Finally, in this segment, it has added Godrej Properties post its sharp correction and underperformance.
With a 60 percent correction in the stock price since Jan’22 and the best-ever year from a business development perspective, the risk-reward of the stock is relatively more attractive now. The company also expects FY24 to be another strong year for business development, highlighted MOSL.
Valuations
After a flat FY23, Nifty now trades at ~18x one-year forward P/E, which is a decent climb-down from the level of 21x seen at the beginning of FY23. Sectors that began the year at elevated valuations - IT, Consumer, and select Private Financials – have seen a moderation in the valuation multiples during the year, noted the brokerage. That said, while absolute valuations are reasonable and well within the range of long-period average (LPA) multiples, the relative valuations for MSCI India are still at an 82 percent premium v/s MSCI EM. This compares with the LPA of 67 percent. While the RBI has raised rates by 250 bps, the 10-year yield has increased by 50 bps in FY23. Given this context, MOSL believes the relative equity v/s bond valuations are now far more palatable than at the beginning of FY23.
