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* After remaining range-bound over the past 18 months, Indian markets finally broke the shackles and surpassed the earlier highs in Jun’23. A combination of: 1) strong macros (e.g., healthy GDP growth of 7.2% in FY23, peaking out of inflation and interest rates, robust external balance and stable currency), 2) stable micros (e.g., decent FY23 corporate earnings on a high base, expectations of high-teens growth in FY24 and correction in commodity prices) and 3) a sharp recovery in FII flows post- Mar’23 has driven the ascent.

* However, while markets are at all-time highs, not all such milestones are similar. Valuations today are relatively more reasonable than the Oct’21 peak of the Nifty. This is largely attributed to the 18-month correction experienced by Nifty when it was range-bound even as its earnings were up 34%/11% in FY22/FY23.

* While the sentiment is upbeat now, we do not believe it is euphoric yet! The recent rally in NSE Midcap 100 index (up 19% in three months) notwithstanding, the index has compounded at a modest 12% over the last six years (Jun’17- Jun’23). Similarly, the NSE Smallcap 100 index (up 20% in three months) has compounded at a measly 7% over the same period. Despite the rebound from the Mar’23 lows, India is underperforming global markets – Nifty is up 7% vs. 32%/16%/18%/17%/15%/10% rally in Nasdaq/S&P/Germany/France/Japan/South Korea in USD terms in CY23YTD.

* Primary markets have seen limited issuances and do nowhere resemble the euphoria of CY21. However, secondary market activities have witnessed a sharp revival with multiple blocks getting transacted in May’23 and Jun’23. These resulted in monetization of stakes for large institutions and promoters alike, underscoring the abundant liquidity in the market!

Flows returning after a long winter; near-term outlook bright

After reporting cumulative outflows of USD26.1b between Oct’21 and Feb’23, FII flows bounced back strongly during Mar-Jun’23, with cumulative inflows of USD15.5b. Conversely, DII flows continued to remain positive at USD4.1b during the same period. As of CY23YTD, FII inflows stand at USD11.8b whereas DIIs remain net buyers with inflows of USD10.3b. India’s strong macroeconomic fundamentals in the context of weak global growth as well as expectations of another year of healthy corporate earnings could keep the flows resilient in our opinion, particularly given the backdrop of a weak post-Covid economic rebound in China.

Corporate earnings snapshot in 1QFY24E; domestic Cyclicals to propel growth

We expect MOFSL earnings to jump 49% YoY while Nifty earnings are likely to grow 25% YoY in 1QFY24. OMC’s profitability is anticipated to surge to INR405b in 1QFY24 from a loss of INR185b in 1QFY23 owing to strong marketing margins. Ex-OMC, MOFSL/Nifty’s earnings should rise 12%/11% YoY for the quarter. Overall earnings growth is likely to be driven once again by domestic Cyclicals such as BFSI and Auto, which are expected to post 47% and 11x YoY jump while Consumer and IT are likely to report a healthy 19% and 16% YoY growth, respectively. Metals and Cement are anticipated to drag the aggregates with a 53% and 17% YoY decline in earnings, respectively. We have marginally cut our FY24/FY25E Nifty EPS by 0.8%/0.5% to INR964/INR1,113. We now forecast the Nifty EPS to grow 20%/15% in FY24/FY25. Ex-Commodities, FY24E Nifty earnings are likely to grow at 16% YoY.

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