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Braving the storm!

India Shining amidst a challenging backdrop

* India has emerged as a shining star in CY22 with healthy outperformance amid varied global headwinds on macros, inflation, rates, currency and geopolitics. While most global equity markets are down 20-25% in YTD’CY22, India is flat and steady (in local currency).

* This outperformance is driven by several key factors such as: a) strong corporate earnings growth over the last two years (Nifty profits up 70% during FY20-22) and expectations of a healthy performance over FY22-24; b) resilient domestic equities inflow (YTD DII equity inflow of USD29b) and c) deft macroeconomic management by the RBI and the government that has helped India stand out in an otherwise volatile and panic-stricken world.

* The 2QFY23E corporate earnings will be reported amid this volatile environment.

2QFY23E earnings highlights

* We expect MOFSL earnings to decline 17% while Nifty earnings to remain flat YoY in 2QFY23. The aggregate performance is adversely impacted by a sharp drag from global commodities. Excluding Metals and O&G, we expect MOFSL and Nifty to post a solid 30% earnings growth each, fueled by BFSI and Autos. Apart from Metals & O&G, the earnings will be dragged by Cement and Healthcare.

* Sectors focused on domestic consumption/investments are likely to outperform the sectors dependent on global demand/cyclicals/commodities.

* Margins are projected to decline 310bp YoY for MOFSL Universe (ex-OMCs). With softening of commodity prices, 2HFY23 should see a good rebound.

* We have reduced our FY23 Nifty EPS estimate by 3% to INR817 (earlier: INR843), driven by cuts in Metals and O&G earnings. We now expect the Nifty EPS to grow 11%/21% in FY23/FY24, respectively. Financials alone are likely to account for two-thirds of the incremental FY23E earnings in Nifty.

Volatility to remain high; trends to emerge better

* Going forward, as we enter the festive season, we expect domestic demand recovery to continue and propel discretionary consumption in India after a pandemic-induced hiatus of two years. ? Coordinated rate hike cycle across the globe is now moving closer towards its final leg, in our view, as we expect inflation to peak barring a major unforeseen spike-up in geopolitical dynamics.

* We expect the RBI to hike repo rate by another 60bp over the next two MPC meetings with terminal repo rate at 6.5%. Commodity costs have moderated since July’22 and augur well for a commodity consumer such as India. That said, given the multiple moving parts (rates, currency, bonds, and geopolitics), we expect volatility to remain elevated but directionally, we believe, trends will get better.

* In this context, we expect domestic equity inflows to remain robust and at the margin, as global climate gets better, FII selling can moderate too.

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