Banking space outshines in Q2F23; Nifty all set to conquer 20000

What’s Buzzing 

Ex-financials, aggregate Nifty earnings posted a muted show in Q2FY23. Topline growth at the Nifty level (ex-financials) was at 1.1% QoQ. Operating profit was down 6.7% QoQ amid pressure on margins, which for the quarter was at 14.6%, down 123 bps QoQ. The gross margin decline was limited to 19 bps QoQ while employee costs & other expenses rose 28 bps & 76 bps, respectively. PAT, in Q2FY23, was down 6.7% QoQ, primarily tracking a decline in margins but was supported by higher other income as well as lower effective tax rate. Including financials (BFSI), at the Nifty level, mid-single digit sequential growth was witnessed across topline and PAT, indicating outperformance (~11-12%) of earnings by financials amid 6.7% earnings decline for the ex-financials domain. 

Context 

Global markets have found comfort in the recently released lower-than-expected inflation readings with growing expectations of a decline in pace of interest rate hikes by global central banks amid already existing growth concerns. Domestic markets have been outperforming their global counterparts and hit a 52-week high amid healthy growth prospects domestically. On the economic parameters front, data points are encouraging in terms of GST collection (Rs 1.52 lakh crore for October 2022, six month high), auto retails (festive retails up 29% YoY, up 6% from pre-Covid levels) and e-way bill generation (7.7 crore in October 2022). 

Our Perspective 

During the Q2FY23 results discussion, management commentary across most businesses was positive on the demand outlook (more so on domestic prospects) while with the recent cool off in key commodity prices, they were hopeful of a margin recovery in H2FY23. Incorporating revised PAT numbers for index constituents post Q2FY23, our forward estimates witnessed an upgrade of ~1.3%, largely for FY24E. Over FY22-24E, Nifty earnings are seen growing at 14.9% CAGR. Keeping the same PE multiple, we now value the Nifty at 20,000 i.e. 21x PE on FY24E EPS of Rs 950. Corresponding target for the Sensex is at 66,600. These are our rolling 12 months’ index target. With a capex cycle revival under way domestically and increasing acceptance of India as a credible, quality driven manufacturing hub (export opportunity), we stay constructive on overall markets. We believe any dips should be used to build a long term portfolio of quality companies that have lean balance sheets, are capital efficient in nature and possess growth longevity.