The Indian economy remains robust, and corporate earnings growth is expected to be in the double digits, but steep valuations are expected to keep the benchmark Nifty50 range bound in the 18,000-19,000 range in 2023, according to Jefferies India.
"With India among the best performing markets globally in 2022 and recently hitting new highs," said Mahesh Nandurkar, head of research at Jefferies, in his report. "Valuations at 20x PE and 225 bps on yields gap are trending above 1 standard deviation levels, and remain a key overhang for market performance in 2023."
However, given the strong economic growth prospects, India is a "buy on dip" market for the brokerage, and it is betting on the domestic-linked sector.
The brokerage's top sector picks are large banks, automobiles, consumer staples, and real estate.
ICICI Bank, State Bank of India, Godrej Properties, DLF, Maruti Suzuki India, Tata Motors, TVS Motor Co, Hindustan Unilever, Godrej Consumer Products, Britannia Industries, Larsen & Toubro, and Thermax are its top picks.
Growth Drivers
The Indian property market is experiencing multi-year pent-up demand and is more dependent on pricing sentiment than mortgage rates. As a result, the Reserve Bank of India's 225-basis-point hike in repo rates since May this year has had no effect on housing demand.
Furthermore, corporate leverage is at a cyclical low, with India one of the few countries in the world experiencing a double-digit decline in corporate debt to GDP ratios.
Jefferies anticipates an increase in private sector capital investment spending in 2023.
Even after assuming significant earnings cuts, India Inc is expected to post another 15%+ growth in FY24. In FY23, 39 of the 65 domestic companies are expected to report a decrease in margin.
"In FY24, we expect 58 of 65 companies to improve their margins." "Autos, cement, (consumer) staples, and industrials are expected to be key sectors with margin improvement," it said.
Fund Flows, Currency
Despite a recent rebound, India's foreign exchange reserves are down $130 billion from their peak in October 2021.
The import cover of 9 months is a 7-year low, and given that the trade deficit is near record highs, Jefferies expects it to fall even further to 7.5 months in 2023. The balance of payments is also expected to remain in deficit next year, implying that the rupee will continue to fall against the dollar.
While a strong dollar is not good for equities, the brokerage expects foreign funds flows to increase in 2023 following record outflows in 2022.
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