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Positive outlook for IT, Telecom, Capital Goods, Cement and Real Estate

Equity markets witnessed strong rally in 2021 with Nifty up ~22% while Nifty Midcap 100/Nifty Smallcap 100 sharply outperformed with gains of ~43%/ 53% respectively. Nifty touched record high of 18600 in Oct’21, buoyed by the decline in COVID cases, a significant pickup in the pace of vaccination, and the consequent sharp recovery in economic activity. Consistently positive earnings surprises also led to rerating and rally in the market.

After touching its new high in October, the Nifty corrected more than 10% in the last two months, led by global factors: Fed’s taper announcement, rising bond yields, higher commodity prices, and strengthening of the US Dollar Index. A big fundraise in the primary market also put some pressure on the secondary market. A total of 63 companies raised Rs1.19 lakh cr through IPOs, making it highest ever fundraise in a particular year. Several new-age digital plays got listed (Paytm, Nykaa, Policy Bazaar, Zomato, etc.) this year and several more lined up ahead. FIIs turned big sellers and have been consistently selling since Oct’21 (sold more than INR90,000 cr in secondary market in 2021). However it was counterbalanced by DIIs who have been consistent buyers in the market (bought more than INR90,000cr), along with the record participation by the retail investors in India.

Sentiments were impacted across global equities in Nov’21 with the detection of a new COVID-19 variant – Omicron. Given lot of uncertainties around this new variant, we witnessed heightened volatility in the last 2 months. Despite the sharp correction, India remains among the top performers in CY21, with the Nifty up ~22% in CY21 v/s -6% decline for the MSCI EM Index.

Otherwise on the domestic front, the economy is witnessing a sustained pick-up post the opening up and festive season, with several high frequency indicators crossing pre-COVID levels. Corporate earnings since 2QFY21 has also been much ahead of expectation. Even in 2QFY22, corporate earnings delivery was robust despite sharp input cost inflation impacting several sectors. While raw material inflation suppressed margins, companies resorted to price hikes to pass on the cost inflation. We expect the strong growth momentum to continue as we are in the beginning of a new earnings cycle and expect Nifty EPS to grow at 35%/19% for FY22/FY23 to INR730/INR873, after delivering 15% growth in FY21.

Going ahead we remain optimistic and expect Nifty to deliver around 12-15% returns in 2022, supported by continuation of economic recovery and strong earnings growth. After the recent correction, Nifty is now trading at ~20x 12 month forward PE which is no longer in the expensive zone. While the market trend might be volatile in the near term on account of potential risk from Omicron variant and fragile global cues, in the long run, strong earnings delivery along with positive macro-economic data would hold the key to drive markets upwards.

We expect sectors such as IT, Telecom,  Capital Goods, Cement and Real Estate to do well in 2022. While Banking and Auto that have underperformed the market so far – have the potential to turn out the dark horse in 2022. 

Our top picks for 2022

Large Caps: TCS, ICICI Bank, Bharti Airtel, L&T, Godrej Consumer Products, Divi’s Labs, Titan, Tata Motors, Reliance Inds, Apolo Hospital

Mid Caps: Angel One, Macrotech Developers, Ramco Cement, Zensar Tech and Devyani International.

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