As per latest survey by IMF, inflation appears to have peaked in 2022, consumer spending remains robust and the energy crisis post Russia-Ukraine war has been less severe than initially feared. Though global economy still faces major headwinds in 2023, global growth is now expected to fall from 3.4% in 2022 to 2.9% in 2023 (vs 2.7% projected earlier). The road to full recovery with sustainable growth and stable prices has just begun and the risks appear to be more tilted towards downside.
On the back of some improvements in macro-economic conditions globally, stock markets continued their upward momentum in the last few months, delivering one of best openings to a calendar year since beginning of 2020 wherein almost all the global markets were in positive territory with many of the key indices in US and Europe delivering a return between 7-15% since the start of 2023.
Urban consumption led by higher discretionary spending in services like Travel and Tourism, healthy investment activity with bank credit expanding by 16.7% upto Jan 2023, governments enhanced focus on infra spend resulting in healthy capacity utilisation of ~75% across industries and normal monsoon + better crop prices which should result in improving rural demand are some of the major drivers which should support healthy economic activity in 2023-24.
Last budget of Modi government before 2024 general elections was on expected lines keeping growth in mind by taking lead in infrastructure spending till private capex picks up and keeping fiscal deficit in control and delivered inclusive budget that aims to fulfill aspirations of the fastest growing economy in the world.
Last few months have been a rough ride for the Indian equity markets as recession-related fears, rising interest rates amid sticky inflation and recent developments related to Adani group have dampened sentiments.
Indian markets have been the worst performer (amongst global markets) in Jan 2023 due to Adani saga as well as budget related uncertainty. However, Sensex did well overall and gained 6.3% from Oct till date but underperformance across Mid and Small-Caps has been quite severe with returns of -1.5% and -2.4% respectively during the same period.
Amid a backdrop of mounting global headwinds with slowdown in growth, higher rates and geopolitical volatilities; all eyes were on the Q3’23 corporate earnings season.
During Q3’23 for Nifty, Revenues grew by 17% Y-o-Y mainly led by pricing growth whereas EBIDTA increased by 11% (small fall in margins) due to RM cost pressures and PAT grew by only 5%. When we compare the same with Mid-Cap 100 index, Revenues/EBIDTA/PAT grew by 11%/9% and -3% respectively.
3Q’23 results season has been average with similar number of hits & misses and almost half of the companies meeting expectations. Growth has been led by Banks, Auto & Auto Ancillary, Capital Goods, Infra, Capital goods, Hotels, Paper etc. whereas Metals, Oil & Gas, Chemicals, Textiles, Pharma, FMCG, Cement and IT struggled.
Most management expect domestic demand to stay strong whereas exports demand seems to have bottomed out and should start seeing sequential improvement in Q4 subject to global macro improvements. Further, with RM and other costs like Freight and Power & Fuel easing to some extent, there is expectations of margin recovery from next quarter onwards.
In terms of macro-economy, we believe the worst is behind us and the situation looks to have stabilized. Some of the key reasons to make us optimistic are as follows:-
- Rising interest cycle nearing peak with easing supplies
- Earnings trajectory to pick up pace
- Rural growth resurgence
- Accelerated government spending
Average revenue growth for Q3’23 for our portfolio is 11% (on par with Mid-Cap 100) whereas PAT de-grew by 8%. On TTM basis, PAT for our portfolio was flat Y-o-Y whereas there has been almost 30% fall on average across our portfolio from 52-week highs. Further, average PE of our portfolio is 14x TTM EPS vs 21x TTM EPS 1 year ago and hence, we feel risk-reward ratio is extremely favourable and there can be decent upside in short-term once macro situation stabilises.
We would like to end the update with the following quote:
“Markets attract those who want to make quick money
But Rewards only those who are comfortable getting rich slowly”
