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Economic recovery, government focus on capex and domestic manufacturing to drive overall growth in FY23

Positive on IT, select BFSI, commodities, retail, real estate, defence and telecom for FY23

Equity market ended FY22 with an impressive 19% gain despite challenges on multiple fronts. Infact Nifty recorded the second-best returns in last seven years led by factors like reopening of the economy, healthy macro data and strong corporate earnings which lifted the Nifty to new high of 18,604 in Oct’21. The Nifty Midcap 100/Nifty Smallcap 100 outperformed with gains of +25% YoY/+29%. All sectors delivered positive returns in FY22 with top gainers being Utilities (+63%), Metals (+62%), Media (+54%), Oil & Gas (+42%), Telecom (+42%), and Technology (+40%). On the other hand, Private Banks, Consumer, Autos, and Healthcare underperformed. DII flows into equities in FY22 were the highest ever at Rs2214 bn, while FIIs witnessed equity outflows of Rs2753 bn after five consecutive years of inflows.

Decline in COVID cases, reopening of economy and the consequent sharp recovery in economic activity drove the market. Consistently positive earnings surprises also lent support to the market. However Nifty corrected almost 15% in H2FY22 from its peak touched in October 2021, on concern over rising inflation, tightening of monetary policy by central banks, uncertain geo-political environment over Russia-Ukraine conflict and volatility in commodity prices. A big fundraise in the primary market also put some pressure on the secondary market. Nifty did witness sharp recovery of ~10% in the month of March 2022 supported by decline in oil prices, de-escalation in Russia-Ukraine conflict and FIIs finally turning net buyers.

The Nifty trades at a 12-month forward P/E of ~20x, which is at marginal premium to its long period average (LPA). As we step into FY23, we believe, the next two quarters are going to see a sharp margin impact and corporate commentaries will worsen before it gets better. Secondly, while the Nifty has not seen much earnings downgrade so far, the broader universe is clearly bearing the brunt of commodity cost inflation – a trend which was visible even in 3QFY22 corporate earnings season. However, so far, with de-escalation in Russia-Ukraine conflict and strong recovery in economic parameters, market is expected to remain in a consolidation mode with positive bias. We expect market volatility to remain high in the near term, amidst global developments. However economic recovery coupled with government focus on capex and domestic manufacturing would drive overall growth in FY23. We are positive on IT, select BFSI, commodities, retail, real estate, defence and telecom for FY23. Also one can consider FMCG, autos and Cement as contra plays and accumulate them gradually for long term.

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