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Earnings Commentary & Festival Demand to Drive the Market

Axis Top Picks basket delivered flattish returns (+0.2%) in a highly volatile Sep’22 which reported a rather mixed performance across sectors and style indices. While the NIFTY 50 index declined by over 4% during the month, our Top Picks basket outperformed the index by a superior margin, showcasing its resilience one more time. Moreover, since its inception in May'20, Our Top Picks basket has delivered an impressive return of 143%, which stands significantly higher than the 84% return reported by NIFTY 50 over the same period. Keeping this performance in view, we continue to believe in our thematic approach in the Top Picks selection.

The Indian market performance has shown resilience in the last couple of months and outperformed the major global market by encouraging margins, thanks to its robust and better economic outlook vis-a-vis other emerging markets. NIFTY 50 reclaimed the 18,000 mark during mid-sep’22 on account of outperformance of the domestic-oriented themes over the cyclical + export-oriented themes. However, after a hawkish US FED stance in the second half of the month, we are seeing weakness in the global market with the investors expecting the continuation of rate hikes in the remaining two FOMC meetings of 2022. In this context coupled with a stronger dollar, we believe the market performance would likely remain volatile and range-bound in the near term. In the same context, FII flows may be volatile in the near term and the market may see an increase in volatility if pressure on the rupee continues. However, over the medium to long term, the Indian equity market is likely to outperform the global market on account of its robust economic outlook.

Sep’22 was a volatile month in which positive momentum was seen in the first half along with a stellar rally in the PSU banks while the second half was marred with a choppy performance due to increased volatility which was driven by the rise in bond yields and dollar index after the FOMC meeting. Consequently, all Indian sectoral indices closed on a negative note, except Pharma and FMCG index, indicating market fundamentals shifting slightly towards defensive mode. However, we are still in early cues to make a full judgement that the market is indeed in a defensive mode. In any case, a normal monsoon brings theexpectation of robust festive demand along with a cool-off in commodity prices. Moreover, economic recovery post-Covid and healthy wage growth (especially in the Services sector) have boosted our confidence in the robust festival demand, making domesticoriented themes more likely to deliver superior performance moving forward. In this context, Q2FY23 earning season stands critical and the market fundamental is likely to be driven by the earnings commentary and the festival demand. In Q2FY23, the margins of Indian corporates are likely to stabilize and may undertake a path of moderation with a cool-off seen in the majority of the commodity prices (including crude). However, Q2FY23 inventory stands at a higher RM cost, indicating H2FY23 to be likely better than H1FY23. Export-oriented themes continue to be under pressure while the domestic themes are likely to surprise on the revenue front. Furthermore, double-digit credit growth of 15% in Aug’22 would translate into better operating profit for the BFSI sector. Keeping these developments in mind, earnings commentary will be the key monitorable. Currently, we foresee FY23/24 NIFTY EPS at 820/929 and we will revise our estimates after Q2FY23.

In the last two/three months, domestic-oriented themes such as Banks, Auto, FMCG, Hospitals, Domestic Industrials, and Discretionary have outperformed the export + cyclical oriented themes. With rising concerns over the global slowdown, aggressive tightening, and preference for domestic interests first, the export-oriented themes are likely to be muted or perform conservatively in the near term. However, in the near term, the market is eyeing the robust festival demand which stood muted for the last two years due to intermittent Covid-19 disruptions. Also, some recovery is expected in the cyclical sectors in the second half with a pickup in government spending.

We maintain our Top Picks recommendation without any changes for the month as we continue to focus on the thematic approach of superior quality companies.

Our Key Themes are as follows:

Macro factors continue to take centre stage: We believe the worst of the FIIs outflow is now behind us as the strong earnings growth and economic recovery will play out for the remaining months of 2022. However, some reversal of flows was seen after a hawkish US Fed stance on an expectation of a continuation of rate hikes in the remaining two FOMC meetings of 2022. In this context, the market will continue to be driven by the following macro-economic factors a) Direction of the dollar index; b) Bond yields; c) Direction of Inflation; d) Growth in the developed world, and e) Trend of commodity prices (including Oil). On the domestic front, the RBI delivered on an expected line and raised the repo rate by 50bps. However, global factors such as the FED and ECB stance on steeper hikes in the upcoming policy meeting will continue to force the RBI to front load interest rates in the coming MPC meetings.

Normal monsoon brings confidence in the rural recovery: The RBI’s MPC statement highlights that the resilience of economic activities in Q2FY22 was driven by robust high-frequency indicators. Private consumption is holding up and a sustained revival was seen in urban demand which should gain further momentum in the upcoming festival season. This coupled with the rural demand picking up are good signs of recovery in the economic activities. Monsoon rainfall ended with a surplus and Kharif sowing was higher than the normal sown area. Furthermore, the reservoir levels are at 87% of full capacity against the decadal average of 77%, indicating green shoots for the Rabi crop as well. We are witnessing a sharp recovery in the services PMI for FY23 and we believe the services sector is likely to do better in the upcoming months. Keeping this in view coupled with the upcoming festival demand, domestic-oriented themes are more likely to deliver impressive performances.

Style rotation is the key: Cool-off in the key commodity prices coupled with the central bank's actions on front-loading the interest rates have changed the market style in the last two months. Growth as a theme has come back in the market in the last three odd months. While the Growth stocks suffered the most in the recent correction, they also recovered rapidly over the last three months on account of a) a Cool-off in commodity prices, b) Robust domestic demand, and c) Reasonable valuation after the correction. On the positive side, given a domestic interest first and India as a domestic consumption economy, local or domestic-oriented themes are likely to perform better in the near term. We continue to believe that profitability will shift from commodity producers to commodity consumers going forward. Keeping this in view, Banks, Automobiles, Hospitals, Discretionary Consumption, and Domestic Industrial themes look attractive in the near term over Export and Commodity sector themes.

Maintain NIFTY Mar’23 target of 18,400: We continue to maintain a positive long-term outlook on the market, supported by the favourable structure emerging with increasing Capex enabling banks to improve credit growth. Moreover, the overall expenditure boost in the Union Budget 2022-23 will help deliver broadbased growth in FY23. Strong earnings trajectory continues in the NIFTY 50 universe with FY21/22 NIFTY EPS growing by 15%/37% to 534/734 respectively. We foresee FY23/24 NIFTY EPS at 820/929 and maintain our NIFTY Mar’23 target of 18,400 unchanged as we value it at 20X FY24 earnings vs. 22X earlier. We cut the NIFTY multiple to accommodate the rising interest rate scenario, which started after a 40bps rate hike in early May’22 (a cumulative rate hike of 190bps since Apr’22). We believe, though aggressive policy tightening will help in curbing inflationary pressure, persistently elevated Oil and Commodity prices would continue to pose challenges to the market multiple in the next few quarters. The current level of India VIX is below the long-term average, indicating that the market is in a neutral zone (Neither panic nor an exuberance zone). While the medium to long-term outlook for the overall market remains positive, we could see volatility in the short run with the market responding in either direction. In this context, the current setup is a ‘Buy on Dips’ market. We recommend investors maintain good liquidity (10%) to use such dips in a phased manner to build a position in quality companies (where the earnings visibility is very high) and with an investment horizon of 12-18 months.

Based on the above themes, we recommend the following stocks: ICICI Bank, Tech Mahindra, Maruti Suzuki India, State Bank of India, Dalmia Bharat, Federal Bank, Varun Beverages, Ashok Leyland, Astral Ltd (India), Bata India, APL Apollo Tubes, HealthCare Global Enterprises, Praj Industries, CCL Products (India), Coal India and Bajaj finance

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