Market Overview – March 2023

Tentative signs in early 2023 were that the world economy could achieve a soft landing—with inflation coming down and growth steady—but the expectation of soft landing has receded recently amid stubbornly high inflation and recent financial sector turmoil. Hence, the outlook for 2023 is uncertain again amid troubles in the financial sector, high inflation and ongoing effects of Russia’s invasion of Ukraine.

The forecast for global economy is for growth to fall from 3.4% in 2022 to 2.8% in 2023. However, advanced economies are expected to see an especially pronounced growth slowdown from 2.7% in 2022 to 1.3% in 2023. Further, global headline inflation is set to fall from 8.7% in 2022 to 7% in 2023 on the back of lower commodity prices but underlying core inflation is likely to decline more slowly and inflation’s return to target is unlikely before 2025.

As per the latest data, India’s GDP growth for the Jan-March 2023 quarter stood at 6.1% compared to 4.4% growth witnessed during Q3’23. Firing on all cylinders, India continues to maintain its streak of world-beating economic growth, growing at 7.2% for FY23. Barring the monsoon and geo-political risks, Indian economy may exceed the initial estimates of 6.5% growth for FY23-24.

Further, the country’s retail inflation i.e. the CPI index slipped to an 18 month low of 4.7% in April 2023, falling from 5.66% in March 2023. This was the last inflation print before the MPC meets for its review meet in June and hence, the recent fall will help the central bank to stay on an extended pause. However, progress of the monsoon will be something which will be keenly watched.

The stock markets have been under pressure since the start of 2023 with the FIIs becoming more cautious with investments in emerging markets. Further, the uncertainties in the US banking sector also resulted in subdued sentiments globally.

However, with the strength being shown by India’s banking sector along with a pause on rate hikes by RBI, record high GST numbers and healthy pick up in manufacturing activity along with a strong earnings season resulted in a revival in FII buying in India. The positive momentum of April continued in May as well with Nifty gaining 2.4% in FY23 YTD. The benchmark is now just 1.9% away from its all-time high. FIIs remained net buyers for the third straight month at USD 5 bn. in May 23 (highest since Sept 22).

Nifty ended FY23 with 11% EPS growth on a high base of 34% growth in FY22. Further, considering the expected EPS for FY24 at Rs 972, Nifty index is trading at 19x 1-year forward (inspite of the sharp 12-13% rally over the last 2 months) which is lower than its 10-year average of ~20x.

During Q4’23, Revenue grew by 13.4% Y-o-Y in the March quarter but after clocking 33% growth in June 2022, this is the 4th successive quarter where the growth slowed down gradually. Operating margins fell by 110 bps Y-o-Y whereas it showed an improvement of 40 bps sequentially amid softening RM prices. Hence, Net Profit grew by 6.5% in the March quarter vs a de-growth of 11.5% seen in the December quarter.

Top-line growth during the quarter was a result of pass through of rising input costs whereas volumes were subdued due to sluggishness in demand. Though the overall Q4’23 results season was largely as per expectation, it was largely driven by strong performance reported by banks which at an aggregate level reported a Y-o-Y growth of 31.9% and 29.7% in revenues and net profit; whereas IT, Pharma, Metals and Consumer Durables reported poor performance.

There is a clear distinction between companies which have been performing very well over the last 2-3 quarters – they are part of banks, capital goods, infra, auto and real estate sectors which have seen extremely strong growth on the back of strong government led policies whereas consumption and exports focused sectors have struggled due to rising inflation which has impacted demand but valuations here have become quite reasonable.

The improvement in growth outlook when the growth outlook for a majority of other large economies is subdued or is being downgraded should not be disregarded and will create a large flow of foreign investor money into India both in terms of FDI and FPI flows. On top of that we have domestic investors continuing to invest regularly in the markets. As these flows get complemented, we will see significant wealth creation in the stock markets.

At Care PMS, though our past performance has been slightly more volatile but whenever the market has turned positive, we have significantly outperformed the broader indices (as can be seen from April 2023 data) and we hope that the history repeats itself in the next phase of bull market.

We would like to end the update with the following quote: