Indian's benchmark Sensex and Nifty have underperformed many global equity markets in the first month of 2023 amid continued selling by foreign investors and lacklustre earnings reported so far for the December quarter.
The recent selling pressure on Adani Group stocks, and banking and new-age technology stocks has also dampened investor sentiment.
Both Sensex and Nifty have declined 2.3 percent each in January so far. Meanwhile, major equity markets have started gaining since the start of this year amid expectations that the US Federal Reserve is likely to slow the pace of interest rate increases. Global indices such as the Dow Jones gained 2.5 percent, Ibovespa 2.4 percent, S&P 500 up 6.02 percent, FTSE 100 4.21 percent, CAC 9.6 percent and DAX 8.8 percent.
Among Asian indices, Nikkei has risen 5 percent, Hang Seng 12.84 percent, Kospi 6.45 percent and Jakarta Composite 0.11 percent.
FII selling
"Talking about the earnings so far, there were some companies that did not leave a good taste in the mouth because earnings were not as per the consensus estimates and there were more downgrades than upgrades, particularly for consumer companies and so-called growth stocks. This had impacted the overall market performance. Secondly, markets continue to witness pressure from FIIs (foreign institutional investors) selling as they remain net sellers for 17 consecutive sessions," said Raj Vyas, Portfolio Manager, Teji Mandi.
FIIs have sold $1.6 billion in Indian equities till date in 2023. FII selling pressure is high in India and funds are shifting to other emerging markets given their attractiveness by discount valuation and revamp in economic growth post the end to China’s Covid zero tolerance policy, according to analysts.
Currently, Sensex and Nifty are trading at a one-year forward Price-Earnings multiple of19.23 and 18.44, compared to a 10-year average forward PE of 18.13 and 17.48, respectively. Meanwhile, the MSCI World Index one-year forward PE trades at 16x from its 10-year average forward PE of 16.47x.
Corporate earnings
Earnings for the December quarter reported so far have not shown improvement. Information Technology companies had a weak start to the quarter, with lukewarm guidance and low headcount additions.
An analysis of 200 companies that have reported their earnings for the quarter revealed a 14 percent increase in revenue from the previous year, but no change in operating profit.
Net profit also dropped by 5.8 percent, marking the third consecutive quarter of decline. Additionally, employee costs have risen by 20 percent Year-on-Year for the sixth consecutive quarter, reflecting pressures on wage costs and new hiring.
Depreciation expenses have also grown at the fastest pace in 7 quarters, and interest costs have surged 30 percent YoY and 16.5 percent sequentially.
IT firms
Among IT firms, HCL Tech reduced its revenue growth forecast for the current financial year to 13.5-14 percent in constant currency terms, down from 13.5-14.5 percent earlier, and lowered its operating margin guidance to 18-18.5 percent from 18-19 percent earlier. Infosys slightly raised its FY23 revenue guidance, but analysts suggested this was an indication of a weak fourth quarter.
The number of employee additions fell for these companies, indicating lower demand in the coming quarters. Tata Consultancy Services saw a reduction of 2,197 employees, Wipro saw a decrease of 435 employees and HCL Tech's employee additions more than halved.
According to Deepak Jasani, Head of Retail Research at HDFC Securities, these early results suggest a further slowdown in sales and profit for Indian companies, possibly due to global macroeconomic factors such as the end of quantitative easing and the ongoing war in Europe.
Factors to consider
Indian stock markets are awaiting the Union Budget, the outcome of the Federal Reserve meeting, and the release of December quarter earnings.
With many economic factors to consider, it is expected that the markets will be limited in their movement before experiencing a rebound, according to Mitul Shah, Head of Research at Reliance Securities.
From the budget point of view, the markets are focused on the long-term capital gains tax, which may possibly be rationalised in the future.
"How it will be handled in this budget is the point of contention. If tax or holding period is increased it will have a short-term effect on the market," said Vinod Nair, head of research at Geojit Financial Services.
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