Continue to look for growth visibility with a domestic bias: IIFL Securities

25 Aug 2022 , 10:48 AM

In the land of the blind…...the one-eyed man is king. While several macro indicators are looking up for the Indian economy, and government finances and corporate/bank balance sheets look strong - making for decent growth prospects over the next 2 years - global macro looks wobbly. Slowdown in US home sales, China property market, US and EU consumer sentiment, are some indicators. Russia potentially cutting off gas supply to EU, is a major risk, and further US tightening is a possibility as inflation remains far above target.

Given this, analysts at IIFL Securities continue to look for growth visibility with a domestic bias, and remove Infosys, but retain other top picks — ICICI Bank, SBI Life, Cipla, ITC and Bharti. In small caps, they remove KIMS and PNC Infratech, and add Century Ply and Equitas SFB. As top sell ideas, they remove their earlier sell recommendation on Pidilite, IRCTC, Dixon and Asian Paints.

Indian economic indicators looking up

IIP at 12% YoY, electricity, coal and cement volume growth at 4.3%/6%/6% on a 3-year CAGR basis, PV sales at 15.6% 3-year CAGR, manufacturing and services PMIs at 55-56, CPI moderating, unemployment falling, consumer sentiment strong (despite dipping in Aug), are positives. As of Q1FY23 - corporate, personal and indirect tax growth - has been 30%/41%/11%, lower than in FY22, but significantly better than the budgeted. Balance sheets are stronger, while capacity utilization is 75%. India’s strong external position from improving share of global exports, steady FDI and much-improved reserves levels, have helped cushion high crude import bill.

Global macro iffy

India’s GDP growth estimates for FY23 are stable, but for other major economies have fallen. Monetary tightening led by the US, discontinuation of stimulus (>25% of GDP in US), Russia stopping natural gas supplies to EU, China techlash followed by property slump, and reluctance to repeat past infra-buildout stimulus packages, are risk factors. Analysts at IIFL Securities do not see a global capex revival for the next 12 months, though in the medium term, factors such as de-globalization, green energy capex, shift to EVs etc., could keep commodities strong.

Multiples rich; choose growth at reasonable valuations

Nifty trades at 1.2 std. dev above 15-year average, both for PE and PB, but India’s emerging rarity value means that Nifty can eke out modest returns, despite history suggesting almost zero returns at these levels. Earnings growth estimates in mid-caps, and especially small caps, are much in excess of historicals. Analysts at IIFL Securities emphasize large caps over mid-caps.