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Nifty showing strong resilience despite challenges: As we usher in the 1QFY23 earnings season, the equity market seems to be at a crossroads. It is engulfed with multitude of headwinds– adverse macros, rising rates, tightening liquidity, and volatile commodity costs. FII outflows in 1QFY23 too have been highest ever at INR108k crore. This along with higher 10- year G-Sec yields, worsening external balance and currency depreciation is posing challenge for market. However, robust DII inflows of INR128k crore and decent corporate earnings have kept Nifty relatively resilient.

Some silver linings making glass appear half full: Commodity costs have corrected in last couple of weeks, offering some respite to the adverse macros. Global bond yields have moderated by 20-50bp from the recent highs and Nifty earnings estimates haven’t seen any worthwhile cuts. On the macroeconomic front, GST collections in 1QFY23 have been robust at INR4.5t, up 37% YoY. Systemic credit growth of ~12% is showing signs of a revival after many years. Services PMI, at 59.2 in Jun’22, was at an 11- year high. Core sector growth came in robust too, even adjusted for the COVID-19 base. The quarterly updates from companies across sectors point towards moderate to healthy operational numbers. Thus, the glass appears half-full, delicately balancing headwinds with some silver linings.

Nifty/MOFSL Universe to register 31%/21% YoY profit growth in 1QFY23E: We expect PAT for our MOFSL Universe to grow by 21% in 1QFY23. BFSI, O&G, and Auto are likely to contribute 87% to incremental earnings. Excluding BFSI, we expect earnings to record a relatively modest 13% YoY growth. Excluding OMCs and Financials, the Universe is likely to see an 180bp YoY decline in EBIDTA margin to 20.5%. Sales/EBITDA/PAT for Nifty should grow by 35%/19%/31% YoY in 1QFY23E. Excluding RIL and ONGC, we expect profit to grow by 13% YoY for Nifty constituents.

Nifty earnings growth remain healthy for FY23: We expect Nifty’s FY23 EPS to grow by 18% YoY on a base of 36% growth in FY22. BFSI, Auto, and O&G will contribute over 100% of incremental profit growth. We estimate 16% EPS growth in FY24. Recent government actions on the O&G front have muddied the earnings picture for the Nifty and created additional uncertainties. The benefit of the recent moderation in commodity costs will accrue only in 2QFY23 and beyond. We do see some earnings downside risks in the near-term as the delayed impact of higher and sticky inflation is leading in a pullback in consumption.

Market strategy: Equity markets have outperformed the global markets on YTD basis, showing relative resilience on back of healthy macro data, strong DII flows and robust Nifty earnings outlook so far. Further, FIIs have reduced their selling intensity drastically in July giving some relief to the market. Improved auto sales data, healthy demand for property in key markets, good monsoon progress, soft commodity prices (including crude) and strong pre-quarterly updates from Banks, Retail and Real Estate companies also helped revive the markets. Meanwhile, valuations for the Nifty have moderated to 18.7x FY23 EPS, in line with its long period averages. We currently prefer large caps given that midcaps continue to trade at premium. We maintain our positive view on BFSI, Auto, Retail, QSR, Defence, Real Estate, while selectively looking at Consumer.

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