- NewsNews
- NewsmakersNewsmakers
- Law & PolicyLaw & Policy
- InsightsInsights
India’s economic growth should stay resilient despite rate hikes and potential corrections should be buying opportunities, Jefferies said.
“Like the global trend, the Indian rate cycle looks close to peaking, and we believe the peak may be 25-50 bps (currently 6.25%) away,” the brokerage said in an investor note. It doesn’t expect the developed world phenomenon of rising rates impacting growth through a slowdown in housing and corporate spending to happen in India.
The Indian housing cycle has multi-year pent-up demand and is more dependent on pricing sentiment, which is now strengthening, Jefferies said, adding that corporate sector leverage is at a cyclical low and corporate spending will likely rise in 2023.
“India’s economic outlook is robust with FY24E GDP growth of over 6%, driven by a housing upturn & improving corporate spend,” equity analysts Mahesh Nandurkar and Abhinav Sinha said in the note.
Following are the key highlights from Jefferies’ strategy for India in 2023:
Macro Concerns Easing
India's foreign exchange reserves have risen $34 billion from recent lows as the U.S. Dollar Index (DXY) has weakened.
Indian rupee likely to be range-bound as USD strength peaks out.
The government leverage is high, but the central government plans to cut fiscal deficit by 60-70 bps annually.
Urban Versus Rural Gap To Reduce
Slowdown in IT hiring and wage hikes implies that urban discretionary growth has probably topped out, while rural wage growth has started showing a small improvement.
The pick-up in construction activity augurs well for rural income growth and with the general elections in mid-2024, the government may prioritize social schemes. In a nutshell, it makes sense to expect a rural recovery.
Corporate Earnings Growth
Corporate earnings growth should be over 15% for FY24 for the Nifty/domestic companies, supported by an improvement in EBITDA margin trajectory.
The consensus expects the NSE Nifty 50 earnings growth to increase by 18% in FY24, improving from a downgrade hit 10% earnings growth in FY23.
Domestic earnings growth, which was a strong 29% in FY23, is likely to moderate to 19% in FY24, but still a respectable number.
Industrials and consumer discretionary sectors are expected to see over 20% earnings growth, with margin recovery a key tailwind.
Market Valuation
The global markets have seen a large correction in 2022, which Nifty has escaped. This, along with China reopening, can put relative performance pressure in 2023.
India may end up underperforming, on an absolute basis, but foreign flows should not be a big negative. Domestic flows have slowed down but an annualized inflow of $25 billion appears sustainable.
Market PE multiple moderated 10% during CY22 to 18.7x and is not as big a concern anymore. The base case target for the Nifty is at 19,000 for end-December.
There could be some significant dips in the market, particularly as the global markets adjust to slowing growth, potential inflation spikes and geopolitical worries.
Jefferies said given its positive view on India's housing and corporate spending cycle, it believes a longer-term foundation for higher economic and earnings growth is being laid. “As such, we would be dip buyers, particularly for the domestic economy focused companies,” it added.
Top Picks
Large banks and developers: ICICI Bank, State Bank of India, Godrej Properties Ltd. and DLF Ltd.
Autos: Maruti Suzuki India Ltd., Tata Motors Ltd. and TVS Motor Company Ltd.
Consumer staples: Hindustan Unilever Ltd., Godrej Consumer Products Ltd. and Britannia Industries Ltd.
Other key picks: Tata Steel Ltd. and select capital goods (Larsen & Toubro Ltd. and Container Corporation of India Ltd.)
Top mid-cap picks: Thermax Ltd., Supreme Industries Ltd., CMS Info Systems Ltd., Aavas Financiers Ltd., Prestige Estates Projects Ltd., Embassy Office Parks REIT, Kajaria Ceramics Ltd., Dalmia Bharat Ltd., Syngene International Ltd. and Indian Hotels Ltd.
