Markets are trading at fair valuations based on expectations of sustained revenue growth; banks, financial to improve

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By Narendra Solanki

Indian markets have shown impressive performance since their lows at the end of June 22 and are so far (Nifty50) about an 18% gain from the June 22 low and August 22 high , including roughly 7% gains in August 22 alone so far with few trading days remaining. Markets largely outperformed their Asian counterparts and the main drivers of this outperformance were a combination of easing global conditions around inflation, extreme US Fed concerns and robust domestic economic conditions. Additionally, the recent period coincided with quarterly results which also added to the tailwinds to already strong markets as results were broadly strong on the revenue front and margins also showed improvement and beat estimates. and defied concerns about deterioration due to continued supply and commodity inflation. .

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Looking at the just-ended quarterly results, the Nifty50 companies overall saw around 32.7% and 1.2% revenue growth on an annual and quarterly basis respectively. On a sectoral basis, almost all sectors posted double-digit growth with the exception of healthcare alone, which was up around 6% year-on-year.

On the margin front, operating margins on an aggregate basis improved from 80 basis points QoQ to around 22% for Nifty50 companies in Q1-FY23, while stemming the decline of only 140 basis points from in the same quarter of the previous year. Expectations factored in further deterioration ahead of the earnings season. On a sector basis, the major improvement in margins was seen in financials, thanks to lower provisioning and better NPA figures.

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Analyzing consensus and current earnings, about 30 Nifty50 companies beat consensus estimates on the revenue front and those that missed 16 of these companies missed estimates by 10%. Similarly, earnings also surprised positively, but the intensity was lower than revenue estimates. Moreover, the earnings estimates were more focused on fears of deterioration ahead of the earnings season, which was not the case. Twenty-eight Nifty50 companies beat estimates out of fifty.

As for valuations, the Nifty50 is currently trading at relatively balanced valuations on a forward-looking basis and is neither too expensive nor very cheap. Analyzing the constituent companies and comparing them to their historical five-year forward valuations, there are only seven companies currently trading more than one standard deviation above their five-year average. A total of 26 companies are trading with a positive standard deviation while remaining below their five-year average. That’s on the back of 32 constituent companies weighing around 73% in the Nifty50 weights reporting growth of at least one quarter over the past four.

Looking ahead, markets are currently trading at fair valuations with expectations of sustained revenue growth and sequential improvement in profitability margins. Sector-wise, the capital goods, engineering and manufacturing sectors including chemicals, auto accessories, defense performed better and are expected to continue to perform, financials mainly banks are expected to also do good. In addition, the consumer sector is also expected to gradually improve in the future. As it stands, the markets are more in a stock-specific zone and should gradually improve with earnings.

(Narendra Solanki, Head-Equity Research (Fundamental), Anand Rathi Shares & Stock Brokers. Opinions expressed are those of the author.)

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