Aditya Birla Sun Life’s Mahesh Patil prefers domestic facing cos over global cyclicals

(Representational image)

Despite a challenging 2022 with inflation, interest rate hikes, and geopolitical tensions, India remained the best among global markets and outperformed its peers. In 2023, Mahesh Patil, Chief Investment Officer of Aditya Birla Sun Life AMC Ltd, is of the view that profit growth for domestically oriented sectors will be robust even though export-oriented sectors may face headwinds.

At the Annual Equity Outlook for 2023 Conference organised by Aditya Birla Sun Life AMC today, Patil said he prefers domestic-focused themes such as banking and financial services, discretionary consumption and domestic manufacturing, to global cyclicals.

Credit Suisse too said that the focus should be on sectors with high domestic exposure, those that can benefit from lower commodity prices and the easing of supply chain issues in 2023.

Several brokerage firms have also identified defence, capex recovery, credit growth revival, rural demand and healthcare services as key investing themes for 2023.

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Valuations

Market participants believe that Indian equities’ outperformance makes it appear overvalued compared to other emerging and a developed markets.

Even as global equity valuations have come off, India remains elevated considering the relatively strong growth outlook and stable macro conditions, said Patil.

He added that the Nifty price-to-earnings and price-to-book valuations are higher than the long-term average valuation.

Equity returns for 2023

Multiple brokerage firms believe that India offers the best growth opportunity over the next five years and sees it outperform significantly compared to other emerging economies and the world economy at large.

Patil said, "We expect Indian equity markets to give returns slightly below earnings growth, i.e., in the 8-10 percent range of CY23. However, we continue to remain optimistic over the medium to long term and expect CAGR (compound annual growth rate) returns in the range of 11-13 percent over the next three years."

"Earnings CAGR of 13-15 percent projected over FY22-24 and is expected to be driven mainly by banking along with auto, consumer and infra sectors," he added.

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The reason why Patil believes the banking sector could spearhead earnings growth is that provisions have now fallen sharply, net interest margins are better and pre-provision operating profits have also witnessed healthy growth.

Besides, he does not see any major downside risk to earnings growth in the near term as domestic demand is resilient, the rural economy is expected to recover, credit growth is on an uptrend, and commodity prices have contracted from their recent highs.