Daily Voice | Don't expect sharp market correction as Nifty EPS likely to grow at 12% in FY24, says Varun Lohchab of HDFC Securities

We expect Q4FY23 earnings to be largely on the same lines as witnessed in Q2 and Q3. Overall earnings are expected to be led by the banking sector as it has been in an advantageous situation in the current scenario where asset repricing has taken place and liabilities repricing is happening with a lag. Asset quality doesn’t seem to be a cause of any major concern for banks right now.

Additionally, we expect commodity-consuming sectors to show positive momentum led by commodity price softening and sustaining demand. Hence, consumer staples and cement could be sectors witnessing these benefits. Further, since Q1FY23 itself our stance has been that FY23 earnings growth will be ~10 percent, we maintain our same view even now. In addition, we believe FY24 earnings growth will be approximately 12 percent.

Q: What is your take on TCS earnings? Which are your best bets in the IT space though the entire sector is not out of woods yet?

TCS delivered a soft quarter led by weakness in North American geography impacted by BFSI vertical, as per market apprehensions. Although headwinds on the cost of delivery have normalised, growth moderation concerns led by macro uncertainties are turning out to be real for the sector.

While we expect tier-1 IT companies to deliver softer performance in Q4FY23, mid-tier IT is expected to continue its relative outperformance. Our preferred bets in the IT space are Infosys, LTIMindtree, Persistent Systems and Sonata Software.

Also read: TCS to continue investments in R&D, tech despite ongoing volatilities

Q: The market rallied 4 percent from recent lows. Is it a bear market rally?

Nifty currently trades at 17.8xFY24 which in our view is reasonable and not very expensive. As Nifty EPS is expected to grow at a healthy 12 percent, so we don't expect any sharp correction. Having mentioned this, we believe the upside is also capped given there are no main drivers for sharp earning upgrades.

Hence, our opinion is that Nifty will remain rangebound in this financial year. Against this backdrop, the recent 4 percent rally can’t be considered a bear market rally. At the most, this can be construed as a bounce-off from possible bottom level of the range in which Nifty is expected to move in this year.

Q: Which are your most preferred sectors for FY24 and why?

It is widely evident that the government has been preferring “investment” over “consumption” in the GDP equation as its strategy to drive the country's growth. Observing the government's clear focus on investment-led growth and on-ground execution updates by companies, we believe sectors and companies which are beneficiaries of capex should be preferred in the current market.

Also read: TCS, Infosys results signal subdued Q4 for IT pack, experts see choppy 1-2 quarters

Against this backdrop, beneficiary sectors such as capital goods, infrastructure, power, cement, chemicals and select financials should be preferred. For the last several quarters, we have been positive on the outlook of large banks given benign asset quality and a strong credit growth environment. In our view, that is expected to continue in the medium term.

Further, post-wedding & festive period, we notice demand normalisation in various consumer discretionary sectors, hence we remain underweight there. We are slightly underweight in the IT sector due to the opacity of FY24 deal pipelines. In short, we prefer sectors where we have a strong profit growth outlook and stocks are available at reasonable valuations.

Q: Which are the important sectors to watch in March FY23 quarter earnings season?

There are a few sectors and monitorables we're keeping our eyes on during this result season:

a) The banking sector is an important one to watch, specifically the deposit growth of each bank and the NIM compression as deposit rate hikes materialize.

b) The IT sector's commentary on global demand softness has the potential to lead to further earning cuts and consequently reduction in consensus NIFTY EPS estimates.

c) We're keenly observing the results of capital good companies to assess the sustainability of their capex-driven earnings.

d) We expect positive results and commentary from the cement companies, as a result of demand recovery and margin expansion on the back of improved realisations and softer input costs.

Q: With respect to equity markets, do you really believe the worst is behind now?

There are far too many uncertain variables to claim that the worst is behind us. Interest rate path volatility in the US remains, and there is still caution around a sustained global economic slowdown. Furthermore, the global geopolitical situation is still not stable enough to chalk it down as a non-factor. In such an environment, probability of earning cuts going forward can’t be ruled out.

Interest rate hikes have seemed to cool down, but any negative incremental macro cues can lead to a hard pivot from central banks across the globe, consequentially compressing valuation multiples. That being said, if the status quo of global macros persists, we feel the Nifty is reasonably priced at current levels. The downside risk to the market, coupled with global uncertainty, makes it too optimistic to expect that the worst is behind us.

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