Here's why the Indian stock market will remain buoyant in the second-half of 2023


July 20, 23 | by: Manish Goel

The bulls have seized control of the domestic stock markets, sending benchmark equity indices soaring to fresh record highs in July and announcing a successful beginning to the earnings season of Q1FY24. On July 18, the benchmark BSE Sensex scaled the 67,000 summit intra-day for the first time, thanks to sustained inflows from FIIs. The Nifty 50, too, hit a high of 19,819. Just days earlier, the Sensex had breached the 66,000-mark intra-day on July 13, after market participants gave a thumbs up to the financial results of IT majors TCS and HCL Technologies.

TCS, the largest IT firm by revenue, recorded a net profit of `11,074 crore in Q1FY24, up 17 per cent year-on-year (YoY), while HCL Tech reported a net profit of `3,534 crore, up 7.6 per cent YoY. After the results were announced, shares of TCS and HCL Tech closed 2.47 per cent and 0.09 per cent higher, respectively. Market analysts predict that Nifty companies will record strong bottom line growth in Q1FY24. Overall, profit growth is expected to be driven once again by the BFSI (banking, financial services and insurance) and automotive sectors.

Since the start of FY24, the Sensex and the Nifty have gained 13 per cent and 14 per cent, while the BSE MidCap and the BSE SmallCap have risen by 22 per cent and 25 per cent, respectively, till July 18. Besides, the current stock market valuation appears to be rather reasonable. On July 17, the price-to-earnings ratio (P/E) of the Nifty was 24.14, compared with its five-year average of 26.43 and its 10-year average of 24.34. “The markets are at all-time highs and some pockets

“Nifty earnings are set to grow 25 per cent YoY in Q1FY24,” says Sneha Poddar, AVP, Research, Broking and Distribution, Motilal Oswal Financial Services. “The profitability of oil marketing companies (OMCs) is likely to surprise the market, as it is anticipated to surge to `40,500 crore during the quarter from a loss of `1.85 lakh crore a year ago,” she says. Excluding OMCs, Poddar adds, Nifty companies’ earnings should rise 11 per cent YoY, while the operating profit margin (excluding OMCs and financials) is likely to expand 110 basis points YoY, “driven by a sharp decline in commodity prices”.

Research and Ranking’s Founder & Director Manish Goel agrees. He expects the Nifty 50 to see robust earnings growth in Q1FY24. “Profit margin expansion across most sectors bodes well for companies’ bottom lines,” he says, adding that the falling prices of base metal, crude oil, and coal point to rising profits.

are expensive. But, the market is in a fair zone with the Nifty’s future P/E trading near its long-term average for the next year,” says Piyush Nagda, Director-Private Wealth & Product Strategy, Monarch Networth Capital. “The consensus EPS (earnings per share) growth for the next three years is expected to sustain at 15-17 per cent CAGR, substantially expanding India Inc.’s profit pool.”

Analysts believe the markets will continue to remain buoyant in the second half of 2023. Recently, Axis Securities predicted the Nifty might reach 20,200 by December 2023.

Several macroeconomic factors underpin this strength, analysts believe. These include increased credit off-take, stable inflation, falling energy prices, robust industrial activity, reduced recession fears, the peaking of the rate hike cycle worldwide, and the deleveraging of Indian corporate balance sheets. The return of liquidity for foreign institutional investors is also helping.

Meanwhile, growth in banks’ credit off-take in FY23 reached an 11-year high of 15.82 per cent YoY, up from 10.66 per cent in FY22. Manufacturing and mining industries drove India’s industrial production to 5.2 per cent in May from 4.2 per cent in April. Till July 17, FIIs had invested `1.37 lakh crore in the domestic equity markets this fiscal.

“Domestic macroeconomic data points depict an upbeat picture, and corporate profitability is growing at a healthy pace... companies will benefit from a domestic multi-decadal growth opportunity that will have a multiplier effect across sectors. We expect the bull run to continue and valuations are comfortable from the perspective of growth in future earnings,” says Anil Rego, Founder & CEO of investment advisory and wealth management firm Right Horizons.

“The Nifty is scaling new highs, which might give the impression that valuations are stretched. But that is not the case. Projections suggest that the EPS growth of the Nifty universe stocks will range between 16 and 17 per cent from FY23 to FY25. As a result, the market is trading at a forward P/E of 17.5-18 times, lower than the long-term average,” Goel says.

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