India Equity Market Returns Likely To Be Muted In 2023 - Nomura

The Indian equity market returns are expected to be muted in 2023 due to the earnings risks and elevated market valuations, Nomura said.

Nomura, which set a target of 19,030 for the NSE Nifty 50 Index for 2023, said it prefers domestic sectors over exporters. The Nifty 50 Index was at 18,268.60 in afternoon Mumbai trading today.

The global macros (inflation and growth dynamics) remain uncertain as economies adjust to a new equilibrium post the Covid-19 pandemic, the brokerage said in an investor note dated 15 December. It added that inflation has peaked, but could remain sticky and this would likely keep the U.S. Federal Reserve hawkish, prioritizing inflation flight over growth slowdown.

Nomura noted that unlike most markets, the Nifty 50 Index is trading at higher valuation multiples than pre-Covid levels. The valuation premium of Nifty to emerging markets at 70% is much higher than historical average of 40%, it added, noting that the market valuations reflect expectations of a strong earnings momentum and relatively stable macro.

The brokerage said India’s outperformance and high valuation are likely to limit the upside.

Following are the key highlights from Nomura’s outlook for the Indian equity market in 2023:

Monetary Policy & Growth

• The tightening monetary policy could drive major economies into recession and India’s growth will likely be adversely impacted from the global spillover.

• Indian market will be relatively unstirred with negative rate/inflation surprise, but the market is likely to be sensitive to the overall growth outlook.

• Nomura is factoring in below-consensus gross domestic product (GDP) growth for India for 2023 (Nomura: 4.5%; consensus estimate: 5.8%).

Corporate Earnings

• The current corporate earnings consensus estimates for FY24/FY25 factor in improvement of profit margin across most sectors to multi-year highs.

• Nomura expects the medium-term growth in earnings from a high margin base to be largely dependent on broader economic growth. Strong corporate and bank balance sheet, policy support and not-so-tight monetary policy are likely to drive recovery in 2024.

• Economic slowdown, higher commodity prices and higher energy prices (geopolitics) are the key variables that present risks to corporate earnings.

• The brokerage sees a mid-single to low-double-digit earnings risk for FY24. For Nifty 100 Index, Nomura sees 4%-12% risk to current street estimates for FY24.

• The street is factoring in 20%/13% earnings growth in FY24/FY25, post 29% (ex-commodities) earning rise in FY23E.

Preference & Top Picks

• Nomura prefers domestic plays with low earnings sensitivity to economic slowdown over exporters.

• The brokerage is Overweight on banks, consumer staples, infrastructure/construction and telecom and Underweight on consumer discretionary, capital goods, metals, and IT services.

• Large Cap Top Picks: State Bank of India (target price: 690 rupees), Axis Bank Ltd. (target price: 1,020 rupees), Larsen & Toubro Ltd., Hindustan Unilever Ltd. (target price: 3,175 rupees) and Reliance Industries Ltd.

• Mid & Small Cap Top Picks: KEC International Ltd. (target price: 555 rupees), Zydus Lifesciences Ltd. (target price: 489 rupees), Medplus Health Services Ltd. (target price: 928 rupees), Indraprastha Gas Ltd. (target price: 550 rupees) and Sansera Engineering Ltd. (target price: 1,127 rupees).